[Federal Register Volume 73, Number 239 (Thursday, December 11, 2008)]
[Rules and Regulations]
[Pages 75497-75527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-29197]



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Part II





Small Business Administration





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13 CFR Part 120



Lender Oversight Program; Final Rule

Federal Register / Vol. 73, No. 239 / Thursday, December 11, 2008 / 
Rules and Regulations

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AE14


Lender Oversight Program

AGENCY: Small Business Administration (SBA).

ACTION: Interim Final Rule with request for comments.

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SUMMARY: This interim final rule incorporates SBA's risk-based lender 
oversight program into SBA regulations. Specifically, the rule codifies 
in SBA regulations SBA's process of risk-based oversight including: 
Accounting and reporting requirements; off-site reviews/monitoring; on-
site reviews and examinations; and capital adequacy requirements. It 
also codifies SBA Supervised Lender regulation and updates SBA's 
business loan program regulations to specify program standards. 
Finally, the rule lists the types of, grounds for, and procedures 
governing SBA enforcement actions against 7(a) Lenders, Certified 
Development Companies, Microloan Intermediaries, and Non-Lending 
Technical Assistance Providers within consolidated enforcement 
regulations. SBA previously published a Notice of Proposed Rulemaking 
(NPRM) addressing all of the topics and issues covered by this interim 
final rule. SBA has already allowed for public comment, reviewed the 
comments and made changes accordingly. SBA is publishing this rule 
interim final rather than proceeding to a final rule, however, in order 
to provide the public with an additional opportunity to comment and to 
allow for any necessary adjustments as the industry moves through the 
economic cycle.

DATES: Effective Date: January 12, 2009.
    Comment Date: Comments must be received on or before March 11, 
2009.

ADDRESSES: You may submit comments, identified by RIN number 3245-AE14, 
by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Bryan Hooper, Director for Office of Credit Risk 
Management, U.S. Small Business Administration, 409 3rd Street, SW., 
8th floor, Washington, DC 20416.
     Hand Delivery/Courier: Bryan Hooper, Director for Office 
of Credit Risk Management, U.S. Small Business Administration, 409 3rd 
Street, SW., 8th Floor, Washington, DC 20416.
    All comments will be posted on http://www.Regulations.gov. If you 
wish to include within your comment, confidential business information 
(CBI) as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you 
must submit the comment by either Mail or Hand Delivery and you must 
address the comment to the attention of Linda Rusche, Supervisory 
Financial Analyst, Office of Credit Risk Management. In the submission, 
you must highlight the information that you consider is CBI and explain 
why you believe this information should be held confidential. SBA will 
make a final determination, in its discretion, of whether the 
information is CBI and, therefore, will be published or not.

FOR FURTHER INFORMATION CONTACT: Linda Rusche, Supervisory Financial 
Analyst, at (816) 426.4860 or [email protected], or Bryan Hooper, 
Director, Office of Credit Risk Management, at (202) 205.3049 or 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

SBA Mission and Lender Oversight

    In 1953, Congress established the Small Business Administration. 
The SBA's mission is to aid, counsel, and assist America's small 
businesses. Central to the mission is the intention that SBA assists 
America's small businesses' access to capital to start, continue 
operations and grow. SBA assists small businesses' access to credit 
through numerous finance programs, including but not limited to the 
section 7(a) guaranty loan program, the section 504 Certified 
Development Company debenture program, and SBA's Microloan Intermediary 
program authorized under 15 U.S.C. 636 and 15 U.S.C. 697a. In each of 
these programs Lenders/Intermediaries partner with SBA to provide 
America's small businesses with needed access to capital to support our 
nation's economy. In partnering, SBA delegates to many Lenders the 
authority to originate, service, and liquidate SBA guaranteed loans.
    Today approximately 4,500 7(a) Lenders, Certified Development 
Companies (CDCs) and Intermediaries participate in SBA lending 
programs. These Lenders hold approximately $67 billion in 7(a) and 504 
loans outstanding. As the SBA portfolio grows and SBA places increasing 
responsibility on Lenders, SBA must have the necessary controls to 
ensure that SBA Lenders' SBA operations are well managed and to avoid 
undue losses. Such controls provide for the long-term health of the 
business loan programs and sustain our ability to meet our statutory 
mission to assist small businesses in obtaining access to capital.
    Central to the establishment of lender oversight controls are their 
incorporation in SBA rules and regulations. Therefore, on October 31, 
2007, SBA published in the Federal Register SBA's Proposed Lender 
Oversight Program rule. (72 FR 61751) The proposed rule was 
comprehensive, covering 7(a) program, 504 program, and Microloan 
program monitoring and enforcement and also included updates to 
business loan program regulations consistent with the oversight 
program. On December 20, 2007, SBA published a notice extending the 
comment period for the proposed rule to February 29, 2008 allowing the 
public additional time to provide feedback. (72 FR 72264) Finally, in 
April 2008, SBA held public meetings on the proposed rule in eight 
cities nationwide to obtain a fuller understanding of the proposed rule 
comments. Those cities included: San Francisco, CA; Los Angeles, CA; 
Boston, MA; Philadelphia, PA; Atlanta, GA; Dallas, TX; Kansas City, MO; 
and Chicago, IL.

II. Comments Received and Changes Made

    SBA received approximately 220 comments on the proposed 
regulations. One hundred and eighty-seven comments were from SBA 
Lenders, including approximately 100 comments from 7(a) Lenders, 80 
comments from CDCs, six comments from SBA Supervised Lenders, and one 
comment from a Microloan Intermediary. SBA also received approximately 
20 comments from non-Lenders, including five comments from trade 
organizations and several comments from legal and accounting 
professionals, consultants, and state government organizations. The 
remaining comments were anonymous.
    Overall, both the written and oral comments were supportive of 
lender oversight. Commenters affirmed their support for lender 
oversight and recognized SBA's ``substantial progress'' in the audit 
and review process areas. Commenters agreed that many of the provisions 
of the proposed rule were indeed necessary. Comment discussions on 
individual regulations within the rule tended to be concentrated on 
certain specific topics (e.g., the Single Audit Act, specificity on 
what constitutes ``satisfactory SBA performance'', CDC annual report 
submissions, Risk Rating System implementation, and administrative 
appeals).

[[Page 75499]]

    SBA appreciated the comments received and has incorporated many 
comment suggestions into this interim final rule. Among the provisions 
where SBA either adopted suggestions or made revisions are provisions 
on the Single Audit Act, criteria for satisfactory SBA performance, CDC 
annual report submissions, and Risk Rating System implementation. 
Comments pertaining to specific provisions are summarized below, along 
with any changes made to those provisions. Provisions not included in 
this analysis did not receive significant comments or, in most cases, 
received no comments; therefore they are adopted as proposed. A 
detailed discussion of the significant comments and changes made by 
section follows.
    Multiple sections--Agency Discretion. The proposed rule included 
several references to SBA's ``sole discretion'' in Agency 
determinations. Approximately 130 commenters objected to this 
terminology. It is not uncommon for SBA to provide the public notice in 
its regulations as to those matters that involve some degree of Agency 
judgment. Some commenters were concerned that these references to 
``discretion'' or ``sole discretion'' implied that the Agency could 
make determinations not subject to any form of review. That is simply 
not the case. While courts will often defer to an agency when it takes 
actions involving the use of agency discretion, such actions may not be 
arbitrary or capricious. Nevertheless, in finalizing these regulations, 
SBA deleted the reference to ``sole'' before discretion. SBA deleted 
the language because we do not believe that it imparted to the Agency 
any meaningful distinction than regular Agency discretion.
    Multiple sections--Satisfactory SBA Performance. Approximately 125 
commenters requested that SBA provide information on the factors it 
expects to consider in addition to the Risk Rating when evaluating 
satisfactory SBA performance. As stated in the preamble in the Notice 
of Proposed Rulemaking published October 31, 2007, other factors SBA 
anticipates considering may include: On-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, other performance related measurements and 
information, and contribution toward SBA mission. In response to the 
comments, SBA has incorporated these examples of other factors in the 
interim final rule.
    These same commenters also requested that SBA provide the relative 
weight of the factors it will consider when evaluating satisfactory SBA 
performance. SBA has considered these comments, but cannot publish the 
relative weights of the Risk Rating and any other factors it may 
consider in determining satisfactory SBA performance. Satisfactory SBA 
performance is not determined by using any arithmetic function. The 
weight attributed to any factor in evaluating a Lender's SBA 
performance may vary depending on the particular circumstances, and as 
a result may need to be determined on a case by case basis. However, 
SBA does plan to provide additional guidance in its Standard Operating 
Procedures (SOPs). In the public meetings, SBA requested comments 
regarding the consideration of contribution toward SBA mission in the 
determination of satisfactory SBA performance; however, no substantive 
comments were received. Similarly, the Agency requests comments in this 
interim final rule regarding how to best consider contribution toward 
SBA mission in the determination of SBA performance.
    Section 120.10--Definitions. In the interim final rule, SBA has 
added a definition of ``Lender Oversight Committee,'' made a technical 
change to the definition of ``Less Than Acceptable Risk Rating'' and 
has revised the definition for Non-Federally Regulated Lender to more 
closely conform to the definition in section 3(r) of the Small Business 
Act. (15 U.S.C. 632) SBA has also added a definition of ``Person,'' 
which had previously been defined with reference to Sec.  145.985 or 
its successor regulation. Section 145.985 was removed from Title 13 of 
the Code of Federal Regulations effective September 18, 2007, and now 
appears in the government-wide non-procurement debarment and suspension 
regulations at 2 CFR Parts 180 and 2700. Rather than reference a 
definition outside of 13 CFR, SBA determined to incorporate the 
definition of ``Person'' within Sec.  120.10.
    Section 120.451--PLP Status Approvals. The proposed rule provided 
that PLP status approvals and renewals would be made by the appropriate 
official in the Office of Capital Access in accordance with SBA's 
published Delegations of Authority. Some commenters requested that such 
approvals be made by the Director of Financial Assistance with input 
from the Director in the Office of Credit Risk Management and that the 
regulations include a specific statement to that effect. The foregoing 
is a matter of agency organization, procedure, and practice and as such 
it is appropriate for inclusion in the Agency's published Delegations 
of Authority. To include such specificity in the regulations would 
unduly limit the Administrator's flexibility to manage internal agency 
procedures. Therefore, SBA is adopting Sec.  120.451 as it was 
proposed.
    Sections 120.460-120.465--SBA Supervised Lender Regulation. 
Approximately 70 commenters supported greater regulatory oversight for 
SBA Supervised Lenders in general. However, a few commenters requested 
that SBA reduce the reporting requirements in proposed Sec.  120.464. 
SBA must have access to certain information to properly supervise SBA 
Supervised Lenders, and the reports required in this rule provide SBA 
with the needed information. SBA does understand the need to minimize 
Lender costs where appropriate. Consequently, the proposed rule 
provided for a waiver of certain reporting requirements for good cause. 
In addition, SBA will work to try to reduce the burden by coordinating 
with other bank regulators and by working with Lenders to accept 
electronic transmissions of the information to be collected. SBA thus 
specifically requests comments on how to further reduce such reporting 
requirements without sacrificing proper oversight.
    Section 120.463(b)--Regulatory accounting for SBA Supervised 
Lenders. The interim final rule includes a technical correction in 
Sec.  120.463(b). Specifically, SBA has clarified that SBA Supervised 
Lenders that are non-public companies must adhere to generally accepted 
auditing standards adopted by the American Institute of Certified 
Public Accountants (AICPA), and SBA Supervised Lenders that are public 
companies must adhere to the standards adopted by the Public Company 
Accounting Oversight Board (PCAOB). The PCAOB was established by the 
Sarbanes-Oxley Act of 2002.
    Section 120.472--Higher Individual Capital Requirement. SBA 
received approximately 65 comments supporting the proposed capital 
requirements for Small Business Lending Companies (SBLCs). Section 
120.472, based on current regulations of a Federal Financial 
Institution Regulator, contains six specific factors that SBA would 
consider in determining whether an SBA Supervised Lender should have a 
higher capital requirement. The commenters also suggested, however, 
that some of the factors that SBA listed in Sec.  120.472 may be overly 
broad and vague. In particular, two factors were cited by commenters as 
broad or vague: management views of senior management, and other risk 
related factors. SBA does not agree. Examples of ``management views of 
senior

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management'' and ``other risk related factors'' would include, for 
example, public announcements by management regarding the net equity 
value of the SBA Supervised Lender or the writedown of the value of the 
SBA Supervised Lender's assets. SBA expects to provide further guidance 
on the factors in the SOPs.
    Several commenters also suggested that the Lender Oversight 
Committee (LOC) rather than the Associate Administrator of Capital 
Access make the determination as to whether to require additional 
capital. The provision in proposed Sec.  120.472 is consistent with 
statutory authority, which limits delegation of authority to issue a 
capital directive to the Associate Deputy Administrator level, retitled 
as the Associate Administrator level. Because it is consistent with the 
statute, SBA is adopting the provision as proposed.
    Section 120.826--CDC Basic Requirements. SBA received a large 
number of comments on proposed Sec.  120.826, which governs basic 
requirements for operating a CDC. As detailed below, comments focused 
mainly on subparts (b), (c), and (e): internal control requirements, 
annual audited financial statements, and Single Audit Act requirements.
    Section 120.826(b)--CDC Internal Control Policy. Section 120.826(b) 
requires each CDC's board of directors to adopt an internal control 
policy. The majority of commenters recognized the need for internal 
control requirements generally, but approximately 45 commenters 
requested that SBA consider the size and organizational structure of 
CDCs when reviewing compliance, particularly compliance with separation 
of duties requirements. Some commenters stated that SBA's proposed 
internal control requirements were comparable to those of a commercial 
lending institution; they expressed concern that the requirements would 
be excessive given the generally smaller size of CDCs. In addition, 
several CDCs requested that SBA provide a sample internal control 
policy. SBA recognizes that CDCs vary in size and sophistication, and 
thus expects that CDCs' levels of internal controls will vary 
accordingly. We believe that the proposed rule allows for such 
flexibility. Consequently, the provision will be adopted in this 
interim final rule as proposed. Nevertheless, SBA will work with 
representatives of the CDC industry to identify resources to assist 
CDCs in developing internal controls appropriate for their various 
sizes and structures.
    Section 120.826(c)--CDC Annual Report Submission. In Sec.  
120.826(c), SBA proposed requiring all CDCs to submit annual audited 
financial statements. Current SBA policy does not require audited 
financial statements from CDCs with 504 loan portfolios of less than 
$20 million outstanding. Approximately 40 commenters suggested that the 
level of risk by CDCs with small portfolios did not justify the 
increase in costs associated with an annual audit. SBA has considered 
these comments and has decided to keep the audit requirement at the 
current level but retain the proposed rule's requirement for the 
qualifications of the accountant as specified in Sec.  120.826(d). 
Accordingly, the interim final rule has been revised to state that CDCs 
with portfolios of $20 million or more in outstanding 504 loans submit 
audited annual financial statements, and that CDCs with portfolios of 
less than $20 million submit annual financial statements reviewed by an 
independent CPA.
    Section 120.826(e)--Single Audit Act. SBA received approximately 70 
comments from CDCs concerning proposed Sec.  120.826(e), which would 
have required not-for-profit CDCs to comply with the audit requirements 
contained in the Single Audit Act (31 U.S.C. 7501 et seq.) and OMB 
Circular A-133, ``Audits of States, Local Governments, and Non-Profit 
Organizations.'' Commenters were overwhelmingly opposed to this 
provision. Commenters argued that the Single Audit Act should not be 
applicable to CDCs given the unique nature of the program funding, that 
the audit would be duplicative of SBA's on-site CDC reviews, and that 
the requirement would impose significant increases in annual audit 
costs. CDCs also anticipated difficulty in procuring auditors qualified 
to perform Single Audit Act audits, particularly for CDCs located in 
rural areas.
    SBA consulted with OMB throughout the comment period concerning the 
applicability of the Single Audit Act to CDCs. OMB is responsible for 
providing interpretations of Single Audit Act policy requirements 
(stated in OMB Circular A-133), and assistance to Federal agencies to 
ensure uniform, effective, and efficient implementation of the Single 
Audit Act. In light of the more than 25 year successful history of the 
CDC program, the unique nature of the program funding and the CDCs' 
administrative and financial role in it, and the comprehensive 
oversight SBA currently performs on CDCs for program compliance and 
results, OMB and SBA have determined that the Single Audit Act does not 
apply to the CDC program. SBA's current oversight includes: Annual CDC 
financial reporting, quarterly off-site monitoring of all CDCs' 
portfolio performance and risk, more detailed on-site reviews of all 
larger CDCs and certain smaller CDCs identified as high-risk, 
corrective action plans for SBA findings from on-site reviews, and 
regular program reviews on CDC status and program compliance. This 
determination applies only to SBA's CDC program; CDCs that participate 
in other Federal programs may still be subject to the Single Audit Act 
as a result of their activities in those programs. Because the Single 
Audit Act does not apply to SBA's CDC program, proposed Sec.  
120.826(e) is deleted in the interim final rule.
    Section 120.830--CDC Annual Report Deadline. SBA received 
approximately 75 comments regarding proposed Sec.  120.830(a), which 
would have required each CDC to submit its annual report to SBA within 
90 days after the end of the CDC's fiscal year. Commenters were 
unanimously opposed to this proposed provision, and recommended that 
SBA keep the current report submission deadline of 180 days. Some 
commenters stated that accelerating the report submission deadline 
would create a financial hardship, particularly for smaller rural CDCs 
with limited access to auditors. Other commenters noted that some CDCs 
have a lengthy and complex audit process because they are part of 
larger organizations, such as councils of governments. Numerous CDCs 
stated that their fiscal year ends in September, which is a very busy 
time for CPA firms. Finally, many commenters noted that SBA had a 90 
day reporting deadline prior to 2003, when the deadline was extended to 
180 days in order to permit CDCs more time to provide financial 
statements with the required level of review. SBA has considered these 
comments, and has decided not to adopt proposed Sec.  120.830(a); the 
CDC annual report submission deadline will remain unchanged at 180 
days. In addition, Sec.  120.830(a) has been revised to reflect the 
different reporting requirements for audited and reviewed financial 
statements.
    Section 120.1005--Bureau of PCLP Oversight. Section 120.1005, which 
establishes the Bureau of PCLP Oversight, received a large amount of 
support from commenters. SBA received approximately 50 comments in 
favor of the proposed provision. In addition, approximately 55 
commenters suggested that the Bureau of PCLP Oversight conduct random 
audits of loans submitted by PCLP CDCs to ensure compliance with SBA 
policies and regulations, particularly environmental and appraisal 
report documentation

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requirements. SBA has reviewed these comments and is considering 
conducting audits of PCLP CDC loans through the Bureau of PCLP 
Oversight or otherwise. Section 120.1005 is adopted as proposed.
    Section 120.1015--Risk Rating System. SBA received approximately 
170 comments on proposed Sec.  120.1015, which incorporates SBA's Risk 
Rating System into the loan program regulations. Commenters questioned 
the incorporation of the Risk Rating System into SBA's regulations at 
this time, citing concerns regarding the effectiveness and 
appropriateness of using this sophisticated tool developed by private 
sector leaders to evaluate business loan portfolios. Many commenters 
also noted that the Risk Rating System has not yet been through an 
entire economic cycle. In addition, approximately 100 commenters 
requested that SBA obtain third-party validation of the Risk Rating 
System.
    These commenters also objected to incorporation of the Risk Rating 
System into certain specific provisions of the proposed regulations. 
Multiple proposed provisions contained the requirement that a Lender 
have or maintain ``satisfactory SBA performance,'' which SBA proposed 
to determine by considering the Lender's Risk Rating, among other 
factors. Specifically, SBA proposed to incorporate ``satisfactory SBA 
performance,'' and thus the Risk Rating, in the following proposed 
provisions: Sec.  120.410(a), Requirements for all participating 
Lenders; Sec.  120.424(b), What are the basic conditions a Lender must 
meet to securitize?; Sec.  120.433(b), What are the SBA's other 
requirements for sales and sales of participating interests?; Sec.  
120.434(c), What are SBA's requirements for loan pledges?; Sec.  
120.451(b)(3), How does a Lender become a PLP Lender?; Sec.  
120.630(a)(5), Qualifications to be a Pool Assembler; Sec.  
120.710(e)(1), What must an Intermediary demonstrate to get a reduction 
in Loan Loss Reserve Fund?; Sec.  120.812(c), Probationary period for 
newly certified CDCs; Sec.  120.820(c), CDC non-profit status and good 
standing; Sec.  120.839, Case-by-case application to make a 504 loan 
outside of a CDC's Area of Operations; and Sec.  120.841(c), 
Qualifications for the ALP.
    SBA has considered these comments. We believe, however, that the 
Risk Rating System is a reasonable internal tool for assessing 
portfolio risk, because it incorporates past, present, and future 
predictive performance to rate Lenders' relative risk to SBA and 
provides SBA with a comprehensive risk management tool previously 
unavailable to the Agency. The Risk Rating System was developed with 
the assistance of Dun & Bradstreet and Fair Isaac, private industry 
leaders in predictive modeling and risk rating systems. These companies 
have performed annual validation testing at both the loan and Lender 
level since 2004. In addition to the validation testing, SBA has 
provided to Lenders and trade groups data demonstrating the correlation 
between the Risk Ratings and portfolio risk factors in various 
presentations given between May and September, 2008. We note that SBA 
may amend the Risk Rating System from time to time. Any such amendments 
will be published in the Federal Register. We also note that a Lender's 
Risk Rating will be used in combination with other factors when 
evaluating satisfactory SBA performance and that SBA does not expect 
that the Risk Rating would be the sole basis for taking enforcement 
action. The relevant provisions of this interim final rule have been 
revised to reflect this expectation. Conversely, a good Risk Rating 
does not preclude SBA from taking actions based on other factors or 
grounds. Therefore, SBA is adopting Sec.  120.1015 as proposed.
    Section 120.1050--On-Site Review/Exam Responses. SBA received seven 
comments on Sec.  120.1050, which describes SBA's on-site examinations 
of SBA Supervised Lenders and on-site reviews of the SBA operations of 
SBA Lenders. Two commenters stated that SBA on-site reviews are 
duplicative of the safety and soundness reviews already conducted by 
Federal regulators. One of these commenters stated that its Federal 
financial regulator examines the Lender's SBA portfolio for safety and 
soundness, although the regulator does not look at compliance with SBA 
program regulations and policies. SBA has considered these comments, 
but believes that its on-site reviews and examinations are a critical 
component of Lender oversight, and are necessary to ensure the 
continued integrity of SBA's lending programs. SBA notes that other 
Federal credit guaranty agencies perform similar reviews of their 
lenders and the management of the agencies' guaranteed loan portfolios. 
Furthermore, to SBA's knowledge, the Federal financial regulators do 
not perform an equivalent review of SBA loan portfolios during safety 
and soundness reviews. SBA will, however, continue to make efforts to 
coordinate its oversight with other bank regulators. If SBA is able to 
leverage the efforts of Federal bank regulators in the future, it could 
lead to a more streamlined review by SBA. Therefore Sec.  120.1050 
remains unchanged from the proposed regulation.
    Section 120.1060--Confidentiality of Reports, Risk Ratings and 
Related Confidential Information. SBA received approximately 50 
comments on Sec.  120.1060, SBAs confidentiality provision for Risk 
Ratings, review and examination reports, and other related confidential 
information. Although all of the commenters supported confidentiality 
requirements generally, some commenters thought that the requirements 
in proposed Sec.  120.1060 were too restrictive. These commenters 
recommended modifying Sec.  120.1060 to allow Lenders to share 
``general information'' on their review and examination results with 
other Lenders and trade organizations in order to develop industry best 
practices. SBA has considered these comments and recognizes the 
commenters' desire to develop best practices. SBA believes, however, 
that allowing Lenders to share ``general'' review and examination 
report information is too indefinite a standard, and would increase the 
risk that confidential information would be disclosed to the public. 
Alternatively, SBA will seek to share best practices with trade 
organizations and Lenders using aggregate information obtained from 
Lender review and examination reports. Therefore, Sec.  120.1060 is 
adopted as proposed.
    Section 120.1400--Grounds for Enforcement Actions--SBA Lenders. SBA 
received comments on several provisions of proposed Sec.  120.1400, 
which details the grounds for enforcement actions against SBA Lenders; 
these comments are detailed below.
    Section 120.1400(a)--Grounds for enforcement actions--Agreement. 
Some commenters objected to 120.1400(a) because it references Form 750, 
the SBA Loan Guaranty Agreement. These commenters argued that the 
Agreement is out of date and, therefore, should not be referenced. SBA 
disagrees with the comment that the form should not be referenced. The 
Form 750 contains the Lender's agreement to participate in SBA programs 
in accordance with program rules and regulations, and every 7(a) Lender 
has executed a Form 750.
    Section 120.1400(b)--Grounds for enforcement actions--Scope. 
Approximately 85 commenters requested that Sec.  120.1400(b), which 
defines the scope of the regulation, be clarified. In response to the 
comments, SBA has revised subsection (b) for clarity.
    Section 120.1400(c)--Grounds for enforcement actions--Grounds in

[[Page 75502]]

General. Subsection (c) lists twelve enforcement grounds that generally 
apply to all SBA Lenders. Some commenters were concerned that the 
enforcement grounds did not provide a degree of certainty regarding 
which enforcement grounds would trigger particular enforcement actions. 
SBA believes that enforcement actions will depend upon the particular 
facts and circumstances of individual cases; therefore SBA cannot be 
constrained to a one size fits all approach to application of 
enforcement actions. However, SBA does plan on providing additional 
enforcement action guidance through SBA's SOPs.
    SBA also received approximately 90 comments on Sec.  
120.1400(c)(4), which describes failure to lend in a commercially 
reasonable and prudent manner, evidence of which may include, but is 
not limited to, the SBA Lender having a repeated Less Than Acceptable 
Risk Rating or an on-site review/examination assessment which is Less 
Than Acceptable. Commenters requested that SBA specify how many low 
Risk Ratings a Lender could be assigned before it would be subject to 
an enforcement action. Commenters also stated that an enforcement 
action should not be taken based solely on a single Less Than 
Acceptable on-site review/examination assessment. SBA has considered 
these comments. The Less Than Acceptable Risk Ratings or on-site 
review/examination assessments reflect the particular facts and 
circumstances of individual cases. Sometimes the risk can be addressed 
solely through Lender corrective actions; sometimes other action must 
be taken. SBA must have the flexibility to take actions appropriate to 
the particular risk evidenced by Less Than Acceptable Risk Ratings and/
or on-site review/assessments. Therefore, SBA is reluctant to set a 
specific number of low risk ratings or Less Than Acceptable on-site 
assessments to trigger enforcement action. However, as noted above, SBA 
does not anticipate using the Risk Rating System as the sole basis for 
taking enforcement actions against SBA Lenders, and has modified Sec.  
120.1400(c)(4) accordingly.
    These same commenters also opposed the use of ``repeated Less Than 
Acceptable Risk Ratings'' as a possible enforcement ground in Sec.  
120.1400(c)(9). SBA has considered these comments, and Sec.  
120.1400(c)(9) has also been modified to conform to the change in Sec.  
120.1400(c)(4).
    Finally, SBA received approximately 90 comments on proposed Sec.  
120.1400(c)(6), which gives SBA authority to take possible enforcement 
action if it determines that a Lender is ``engaging in a pattern of 
uncooperative behavior'' or taking an action that is ``detrimental to 
an SBA program, that undermines management or administration of a 
program, or that is not consistent with standards of good conduct.'' 
This language was based on current language in the CDC regulations. 
Commenters stated that this provision is overly broad, and requested 
that SBA give examples of the types of behavior that might trigger an 
enforcement action under this provision. One commenter also requested 
that, prior to taking enforcement action against a Lender, SBA provide 
notice to the Lender explaining why the Lender's actions were 
uncooperative, detrimental to the program, undermined SBA's management 
of the program, or were not consistent with standards of good conduct 
prior to enforcement. In response, SBA is providing examples of the 
types of behavior that may trigger this provision. Those behaviors 
include, but are not limited to, refusal to implement actions to 
correct material weaknesses found in on-site reviews/assessments, and 
failure to carry out an approved plan to correct material weaknesses 
identified in an on-site review/assessment before a new on-site review/
assessment is conducted. As for the additional notice, SBA has added 
language to the interim final rule providing such notice prior to 
enforcement.
    Section 120.1400(d)(5)--Grounds for enforcement actions--Grounds 
required for certain enforcement actions against SBA Supervised Lenders 
(except Other Regulated SBLCs) or, as applicable, Other Persons--For 
transfer of loan portfolio. SBA has made a clarification to Sec.  
120.1400(d)(5)(i) consistent with statutory authority. 15 U.S.C. 
650(i). Specifically, we revised the ``and'' in subparagraph ``i'' to 
read as an ``or''.
    Section 120.1425(c)(2)--Grounds for enforcement actions--
Intermediaries participating in the Microloan Program and NTAPs--
Grounds in general. Section 120.1425(c)(2)(viii) has been modified to 
conform with the changes in Sec.  120.1400(c)(4) and (9) and reflect 
that SBA does not anticipate using the Risk Rating System as the sole 
basis for taking enforcement actions against Intermediaries or NTAPs.
    Section 120.1500(a)(1)--Portfolio Guaranty Dollar Limit. SBA 
received several comments requesting clarification of Sec.  
120.1500(a)(1), SBA's proposed portfolio guaranty dollar limit 
enforcement action. The commenters requested that SBA clarify whether 
the guaranty limit applies to the total dollars of SBA loans or 
debentures guaranteed for an SBA Lender, or whether it restricts the 
maximum dollar amount on individual loans or debentures a Lender may 
make. SBA intended Sec.  120.1500(a)(1) to apply only to the total 
dollars of SBA loans or debentures guaranteed for an SBA Lender. SBA is 
adopting Sec.  120.1500(a)(1) as proposed.
    Section 120.1500(a)(3)--Continuing Guaranty. Approximately 80 
commenters supported Sec.  120.1500(a)(3), which provides that the 
suspension or revocation of a Lender from an SBA program will not 
invalidate a guaranty previously provided by SBA. These commenters 
further recommended that this provision be moved to the introductory 
paragraph to Sec.  120.1500, so as to apply to all enforcement actions, 
not just non-immediate suspensions or revocation. SBA has considered 
these comments, and agrees that the provisions should apply to all 
enforcement actions. We have therefore moved the provision to the 
beginning of the text, and clarified that an enforcement action, by 
itself, would not invalidate a guaranty previously provided by SBA.
    Section 120.1500(b)--Secondary Market Suspension. SBA received 
approximately 90 comments opposing secondary market suspension as an 
available enforcement action. As stated in the proposed rule preamble, 
SBA is including this enforcement provision as a means of limiting an 
SBA Lender's risk exposure to SBA and the Secondary Market. Commenters 
contended that many Lenders are reliant on access to the Secondary 
Market in order to continue their 7(a) lending activities, and that 
such a suspension or revocation ``is tantamount to a program suspension 
or termination.'' Many commenters also questioned the need for SBA to 
provide additional protection to the Secondary Market, because 
``purchasers in the Secondary Market conduct extensive due diligence.'' 
Finally, numerous commenters questioned SBA's need to protect itself 
from an SBA Lender's risk exposure, noting that the Agency has ``very 
little risk of loss'' because Lenders are ultimately responsible for 
their loans if SBA determines the need to repair or deny liability.
    SBA has considered these comments, and recognizes that suspension 
or revocation of authority to sell or purchase loans or certificates in 
the Secondary Market could have very serious implications for certain 
7(a) Lenders. Nonetheless, SBA has a responsibility to protect the 
integrity of the Secondary Market, whose operation is contingent upon 
SBA's full faith and

[[Page 75503]]

credit guaranty. SBA must also mitigate the risk to the Agency. SBA 
disagrees with the contention that the Agency has little risk of loss 
due to the Lender's responsibility to SBA in the case of a repair or 
denial of liability. If SBA has previously honored its guaranty to a 
holder in the Secondary Market, SBA is subject to risk that it will not 
be able to recoup funds from the SBA Lender, particularly if the SBA 
Lender is insolvent. Furthermore, for some SBA Lenders, Secondary 
Market Suspension may be preferable as an alternative to suspension or 
revocation of the SBA Lender's authority to participate in the SBA 
program. Therefore, Sec.  120.1500(b) is adopted in the interim final 
rule as proposed.
    Section 120.1600 (a)(3)--Enforcement Procedures--SBA Timeframes. 
Approximately 90 commenters requested that SBA give a definitive time 
period for rendering a decision in enforcement actions in order to 
allow the affected Lender to plan its SBA operations with some degree 
of certainty. The majority of these commenters recommended that SBA 
adopt a 60-day response time. Commenters also requested that SBA adopt 
an Agency response deadline of 30 days instead of the 90-day deadline 
proposed by SBA on immediate suspensions.
    SBA recognizes the need for SBA Lenders, Intermediaries, and NTAPs 
(non-lending technical assistance providers) to plan their future SBA 
operations with certainty. SBA also recognizes the need for the Agency 
to provide an expeditious response, particularly when an immediate 
suspension has been put into effect. But SBA must balance this against 
the time needed to make the appropriate decision. SBA will make every 
effort to issue final enforcement decisions as quickly as possible and 
has decided to adopt a 30-day deadline (unless SBA provides notice that 
it requires additional time) for the final decision in the case of an 
immediate suspension and a 90-day deadline (unless SBA provides notice 
that it requires additional time) for final decisions for all other 
enforcement actions. We note that consideration of additional 
information (e.g., information provided by the Lender subsequent to 
objection) may extend the deadline accordingly.
    Section 120.1600(a)(5)--Enforcement Procedures--Administrative 
Appeals Process for SBA Lenders, Intermediaries, and NTAPs. In general, 
proposed Sec.  120.1600(a)(5) provided SBA Lenders, Intermediaries, and 
NTAPs streamlined enforcement appeal rights direct to Federal district 
court rather than requiring that Lenders first go through SBA's 
administrative appeals process. Many commenters requested that SBA 
incorporate an administrative appeals process within SBA's enforcement 
procedures framework citing cost concerns.
    SBA has considered these comments and considered the possibility of 
incorporating an administrative appeals process for enforcement 
decisions, including to the Office of Hearings and Appeals (OHA). 
However, SBA has concluded that a direct appeal to Federal district 
court will, on balance, be a more efficient and cost-effective process 
for Lenders to utilize. For example, Lenders would be able to seek 
immediate injunctive relief from the Federal district courts, whereas 
OHA does not have the authority to issue injunctive relief. The Lender 
could lose valuable time and incur greater expense if it had to pursue 
its appeal through OHA before it could seek injunctive relief from the 
Federal courts. In reaching its conclusion, SBA has also considered the 
fact that SBA's enforcement decision will have been based on multiple 
levels of administrative review, including in most cases the 
independent Lender Oversight Committee. In addition, the extensive due 
process provisions of Section 1600 include notice and an opportunity to 
object.
    Section 120.1600(b)--Enforcement Procedures--Administrative Appeals 
Process for SBA Supervised Lenders, Management Officials and Other 
Persons. SBA has made technical changes to Sec.  120.1600(b)(1)(i) and 
(b)(3)(i) to clarify that administrative hearings under these 
subparagraphs, which are specifically required by the Small Business 
Act, will be conducted by SBA's Office of Hearings and Appeals in 
accordance with 15 U.S.C. 650 and applicable sections of Part 134 of 
SBA regulations.

III. Chart of Regulations Relocated

    Some of the regulations promulgated in this interim final rule were 
relocated from other sections within Part 120. In some instances, the 
relocation involves simply moving text from one regulatory section to 
another. In other instances, SBA is proposing substantive changes with 
the move. See below chart of regulations relocated.

                     Chart of Regulations Relocated
------------------------------------------------------------------------
                               Regulation subject    Proposed regulatory
 Current regulatory citation         matter               citation
------------------------------------------------------------------------
Sec.   120.414..............  SBA access to 7(a)    Sec.   120.1010.
                               Lender files.
Sec.   120.415..............  7(a) program--        Sec.   120.1400
                               Suspension or         (grounds).
                               revocation of        Sec.   120.1500
                               eligibility to        (types of
                               participate.          enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.442..............  Suspension or         Sec.   120.1400
                               revocation of CLP     (grounds).
                               status.              Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.454..............  PLP performance       Sec.   120.1000(a)
                               review.               (Risk-Based Lender
                                                     Oversight).
                                                    Sec.   120.1025 (off-
                                                     site reviews/
                                                     monitoring).
                                                    Sec.   120.1050 (on-
                                                     site reviews and
                                                     examinations).
Sec.   120.455..............  Suspensions or        Sec.   120.1400
                               revocations of PLP    (grounds).
                               status.              Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.470(b)(3)........  Minimum SBLC capital  Sec.   120.471
                               requirement.          (minimum capital
                                                     requirement).
                                                    Sec.   120.472
                                                     (higher individual
                                                     minimum capital
                                                     requirement).
                                                    Sec.   120.473
                                                     (procedures for
                                                     higher individual
                                                     minimum capital
                                                     requirement).
Sec.   120.470(b)(4)........  SBLC capital          Sec.   120.462(d).
                               impairment.
Sec.   120.470(b)(5)........  SBLC issuance of      Sec.   120.471(d).
                               securities.
Sec.   120.470(b)(6)........  SBLC voluntary        Sec.   120.471(c).
                               capital reduction.
Sec.   120.470(b)(7)........  SBLC reserve for      Sec.   120.463(e).
                               losses.

[[Page 75504]]

 
Sec.   120.470(b)(8)........  SBLC internal         Sec.   120.460(b).
                               controls.
Sec.   120.470(b)(9)........  SBLC dual control...  Sec.   120.470(d).
Sec.   120.470(b)(10).......  SBLC fidelity         Sec.   120.470(e).
                               insurance.
Sec.   120.470(b)(11).......  SBLC common control.  Sec.   120.470(f).
Sec.   120.470(b)(12).......  SBLC management.....  Sec.   120.470(g).
Sec.   120.470(b)(13).......  SBLC borrowed funds.  Sec.   120.470(h).
Sec.   120.471..............  SBLC recordkeeping    Sec.   120.461.
                               and retention
                               requirements.
Sec.   120.473..............  SBLC change of        Sec.   120.475.
                               control.
Sec.   120.474..............  SBLC prohibited       Sec.   120.476.
                               financing.
Sec.   120.475..............  SBLC Audits.........  Sec.   120.490.
Sec.   120.476..............  SBLC suspension and   Sec.   120.1400
                               revocation.           (grounds).
                                                    Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.716..............  Microloan             Sec.   120.1425
                               Intermediary and      (grounds).
                               NTAP suspension and  Sec.   120.1540
                               revocation.           (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.853..............  CDC reviews.........  Sec.   120.1000,
                                                     120.1050.
Sec.   120.854..............  CDC grounds for       Sec.   120.1400
                               taking enforcement    (grounds).
                               action.
Sec.   120.855..............  CDC types of          Sec.   120.1500
                               enforcement actions.  (types of
                                                     enforcement
                                                     actions).
Sec.   120.856..............  CDC enforcement       Sec.   120.1600
                               procedures.           (enforcement
                                                     procedures).
------------------------------------------------------------------------

IV. Justification for Interim Final Rule

    SBA finds that good cause exists to publish this rule as an interim 
final rule. As discussed above, SBA previously published a Notice of 
Proposed Rulemaking (NPRM) addressing all of the topics and issues 
covered by this interim final rule. SBA has already allowed for public 
comment, reviewed the comments and made changes accordingly. SBA has 
determined that the changes made in this rule are a logical outgrowth 
of the proposed rule and the comments received on the proposed rule. 
Procedurally, SBA could therefore issue a final rule; however, SBA is 
publishing this rule interim final rather than proceeding to a final 
rule in order to provide the public with an additional opportunity to 
comment.
    SBA has a statutory obligation to implement a Lender Oversight 
Program and it is critically important during the current financial 
crisis that a proper oversight program is in place. Any delay in 
promulgation could be prejudicial to the integrity of the program and 
could potentially result in additional losses to the American 
taxpayers. SBA is requesting additional public comments in order to 
further shape the program. Publishing this rule as interim final allows 
for any needed adjustments as the industry moves through the economic 
cycle.
    SBA invites comments from all interested members of the public. 
These comments must be received on or before the close of the comment 
period noted in the DATES section of this interim final rule. SBA may 
then consider these comments in making any necessary revisions to these 
regulations.
    Compliance with Executive Orders 12866, 12988, and 13132, the 
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork 
Reduction Act (44 U.S.C., Ch. 35) Executive Order 12866: The Office of 
Management and Budget has determined that this rule constitutes a 
``significant regulatory action'' under Executive Order 12866 thus 
requiring a Regulatory Impact Analysis, as set forth below.

A. Regulatory Objective of the Proposal

    This rule incorporates SBA's risk-based lender oversight program 
into SBA regulations. Specifically, the rule codifies in 13 CFR SBA's 
process of risk-based oversight including: (i) Accounting and reporting 
requirements; (ii) off-site reviews/monitoring; (iii) on-site reviews 
and examinations; and (iv) capital adequacy requirements. The rule also 
consolidates and lists the types of, grounds for, and procedures 
governing SBA enforcement actions within Subpart I. This rule is a 
necessary first step to provide coordinated and effective oversight of 
financial institutions that originate and manage SBA guaranteed loans.
    These regulatory changes will improve SBA's oversight and 
management of the 7(a), 504, Microloan and NTAP programs. SBA believes 
that there are no viable alternatives to these changes that would 
produce similar positive results without imposing an additional burden 
on the SBA or the public.

B. Baseline Costs

1. Baseline Costs for 7(a) Lenders (Excluding SBA Supervised Lenders)
    All 7(a) Lenders, excluding SBA Supervised Lenders, are currently 
required to be supervised and examined by a state or Federal regulatory 
authority, satisfactory to SBA. This is a cost already borne by these 
7(a) Lenders. In addition, these 7(a) Lenders are subject to SBA's 
supervisory and enforcement provisions contained in the business 
programs portion of Part 120.
    The estimated annual baseline costs to the Federal government for 
7(a) Lenders' oversight is provided for in the existing OCRM 
infrastructure.
2. Baseline Costs for SBLCs
    Each SBLC is currently required to submit audited financial 
statements within three months after the close of each fiscal year and 
interim financial reporting when requested by SBA. SBA also currently 
requires that SBLCs submit a report on any legal or administrative 
proceeding, by or against the SBLC, or against an officer, director or 
employee of the SBLC for an alleged breach of official duty; copies of 
any report furnished to its stockholders; a summary of any changes in 
the SBLC's organization or financing; notice of capital impairment; and 
such other reports as SBA may require from time to time by written 
directive. The collection of the information and reports referenced 
here is largely already maintained by the SBLCs for operational and 
financing purposes. It is estimated that preparation and submission of 
this information takes about 80 hours annually for each SBLC. The hour

[[Page 75505]]

burden is an SBA estimate based on inquiries made to selected SBLCs. 
The estimate of the total annual cost burden is based on an average 
annual outside audit fee of $8,000 per respondent, plus an additional 
$2,000 per respondent for staff involvement in the independent audit 
engagement and SBA reporting (approximately 15 hours of CFO time at a 
$100 hourly rate plus 15 hours of administrative profession time at a 
$30 hourly rate, rounded). This total cost burden is estimated at 
$140,000 for 14 SBLCs. SBA has reduced this figure by $20,000 to 
$120,000 to adjust for reduced costs for smaller SBLCs. The estimated 
annual cost to the Federal government for this information collection 
is approximately 8 hours of Financial Analyst time at $55 per hour, or 
$6,160 annually for all 14 SBLCs. Any additional estimated indirect 
annual cost to the Federal government for oversight of these SBLCs is 
provided for in the existing OCRM infrastructure. During the comment 
period, one comment was received questioning whether the Baseline Costs 
for SBLCs were estimated too low. However, no information was provided 
regarding which specific component(s) of the estimate were of concern. 
SBA considers the information it received directly from selected SBLCs 
during development of the rule to be most applicable; therefore, the 
SBLC baseline costs estimate remains unchanged from the proposed rule.
3. Baseline Costs for NFRLs
    No direct costs are currently incurred by NFRLs for SBA oversight 
and related functions discussed in this rule. The estimated annual cost 
to the Federal government for oversight of these NFRLs is provided for 
in the existing OCRM infrastructure.
4. Baseline Costs for CDCs
    Each CDC is currently required to submit to SBA an annual report 
within 180 days of the fiscal year end, including financial statements 
of the CDC and any affiliates or subsidiaries and such interim reports 
as SBA may require. The collection of the information and reports 
referenced here is largely already maintained by the CDCs for 
operational purposes. SBA has estimated that preparation and submission 
of this information takes approximately 28 hours annually for each CDC, 
at an average cost of $30 per hour for staff compilation, which 
computes to a cost of $840 per CDC, and a total of 7,560 hours for all 
CDCs. This total cost burden is $226,800 (7,560 hours x $30) for the 
approximately 270 CDCs. The estimated annual cost to the Federal 
government for this information collection is approximately 1 hour of 
financial analyst time per CDC or 270 hours total for all CDCs, at a 
cost of $55 per hour. Estimated annual Federal cost burden therefore is 
estimated at $14,850 (270 hours x $55). The remaining estimated annual 
cost to the Federal government for oversight of CDCs is provided for in 
the existing OCRM infrastructure.
5. Baseline Costs for Microloan Intermediaries and NTAPs
    Microloan Intermediaries and NTAPs currently incur no direct costs 
for oversight and related functions as discussed in this rule. The 
estimated annual cost to the Federal government for oversight of these 
Microloan Intermediaries and NTAPs is currently provided for in the 
existing OFA infrastructure.

C. Benefits and Costs of the Rule

1. Benefits and Costs of the Proposed Rule to all SBA Lenders, 
Microloan Intermediaries and NTAPs
    The rule benefits SBA Lenders, Microloan Intermediaries, and NTAPs 
by generally consolidating oversight authority and responsibility 
within one SBA office, OCRM. These institutions also benefit from 
knowledge of established and further defined programmatic standards, 
enforcement grounds, ranges of enforcement actions and procedures for 
supervision and enforcement actions as set forth in the rule. They 
further benefit from performance feedback to the extent it assists them 
in improving their SBA operations and minimizing losses.
    While there are specific benefit and costs issues for specific 
categories of Lenders as detailed below, all SBA Lenders, Microloan 
Intermediaries and NTAPS will incur some relatively minimal costs 
related to the rule's incorporation of review/exam reporting (e.g., 
self-assessments and related reporting, corrective action plans). Self-
assessments and review/exam reporting are a timely and cost effective 
means of overseeing and monitoring the SBA performance and compliance 
of SBA Lenders, Microloan Intermediaries and NTAPs.
2. Benefits and Costs of the Rule to 7(a) Lenders (Other Than SBLCs and 
NFRLs)
    No additional direct costs will be incurred by 7(a) Lenders for 
oversight as contained in the rule. No additional reporting or direct 
costs will be incurred by 7(a) Lenders with the rule's implementation.
    SBA received approximately 90 comments requesting that SBA include 
cost estimates of appealing proposed enforcement actions to a Federal 
district court rather than SBA's Office of Hearings and Appeals (OHA). 
The Agency does not currently have data that would enable it to provide 
a reasonably accurate estimate of Lenders' costs for appealing such 
actions through the judicial process. SBA is also unable to extrapolate 
from data on the costs of appealing to OHA because although that 
process is currently available, the process has been used rather 
infrequently and any such extrapolation would be unreliable. SBA is 
willing to consider comments from Lenders that would enable the agency 
to obtain the relevant costs data.
    SBA also received one request for estimates of the costs that could 
be incurred in connection with possible enforcement actions included in 
Sec.  120.1500 of the interim final rule. SBA is unable to estimate the 
cost of appealing or responding to potential enforcement actions SBA 
might take, because the type of enforcement action and steps necessary 
to correct a deficiency will vary based on the specific deficiency and 
characteristics and situation of the particular Lender. SBA is willing 
to consider comments from Lenders that would enable the agency to 
obtain the relevant costs data.
3. Benefits and Costs of the Rule to SBLCs
    The rule provides for more developed internal control requirements 
and adoption of a formal capital plan. It requires filing of (i) 
quarterly condition reports (including financial statements); (ii) 
reports of changes in financial condition; (iii) notice of change of 
auditor; (iv) capital restoration plans; and (v) Other Regulated SBLC 
Reports, with certifications as to accuracy or compliance (including 
capital compliance) as applicable. Because internal controls, formal 
capital plans, and quarterly financial statements are likely already 
maintained by the SBLCs for operational purposes, there is little or no 
additional cost for these new requirements. Preparation and submission 
of all the additional reports and the new recordkeeping takes 
approximately 3 hours annually of additional CFO time at a $100 hourly 
cost, plus 3 hours annually of additional administrative professional 
time at a $30 hourly cost. Therefore, the total additional cost burden 
is $5,460 ($390 x 14) for 14 SBLCs.
4. Benefits and Costs of the Rule to NFRLs
    The rule requires each NFRL to submit an annual report, including

[[Page 75506]]

audited financial statements within three months after the close of 
each fiscal year. The rule further requires that all audited financial 
report filings are prepared in accordance with Generally Accepted 
Accounting Principles (GAAP), and include an opinion from the 
independent accounting firm engaged in the audit. It also requires 
NFRLs to submit: (i) A report on any legal or administrative 
proceeding, by or against the NFRL, or against an officer, director or 
employee of the NFRL for an alleged breach of official duty; (ii) 
copies of any report/publications furnished to its stockholders; (iii) 
summaries of changes in the NFRL's organization or financial structure, 
personnel and eligibility; (iv) notice of capital impairment; (v) 
quarterly condition reports; (vi) changes in financial condition 
reports; (vii) recapitalization plans; and (viii) notice of changes in 
auditors and such other reports as SBA may require from time to time by 
written directive--with certifications as to accuracy and compliance 
(including capital compliance), as applicable. The rule requires 
adoption of a developed internal control policy, records maintenance, 
and adoption of a formal capital plan. Much of the collection of the 
information and reports referenced here, as well as the requirements 
for internal control, records retention and adoption of a formal 
capital plan are information likely already maintained by the NFRLs for 
operational, and in some instances financing, purposes. Preparation and 
submission costs are consistent with that of the baseline for the 
SBLCs, at 80 hours of external auditor time at $100 hourly rate, plus 
an additional $2,000 per NFRL for staff involvement in the independent 
audit engagement (approximately 15 hours of CFO time at a $100 hourly 
rate plus 15 hours of administrative profession time at a $30 hourly 
rate, rounded) for a total of $10,000 per NFRL. Additional reporting 
and recordkeeping requirements to the NFRLs (that which would be new to 
SBLCs as well) are at 3 hours of additional CFO time at a $100 hourly 
rate plus 3 hours of additional administrative professional time at a 
$30 hourly rate ($390 per NFRL). Since there are no current baseline 
costs to NFRLs, the total additional cost burden for this rule for the 
58 NFRLs is $602,620 ($10,390 x 58 NFRLs).
5. Benefits and Costs of the Rule to CDCs
    Approximately 70 commenters requested that SBA include an estimate 
for the cost of CDCs' compliance with the Single Audit Act 
requirements. SBA and OMB have determined that the Single Audit Act 
does not apply to SBA's 504 program; therefore, cost estimates of 
Single Audit Act compliance are unnecessary.
    SBA also received several comments from CDCs requesting estimates 
of the costs of implementing the internal control requirements 
contained in Sec.  120.826(b). Because most CDCs likely already 
maintain internal controls for operational purposes, and because the 
interim final rule allows for flexibility in the internal control 
structure of CDCs with varying size and sophistication, SBA estimates 
little or no additional cost for the requirements.
    SBA did not adopt the proposed 90-day annual report filing deadline 
or the proposed requirement that all CDCs obtain audited financial 
statements in the interim final rule; therefore, the rule does not 
implement any significant changes to CDC operations or management. 
Thus, there are no additional costs of the rule and no substantive 
alteration of Baseline Costs for CDCs outlined in paragraph 4 of 
section B.
6. Benefits and Costs of the Rule to Microloan Intermediaries and NTAPs
    No additional direct costs are incurred by Microloan Intermediaries 
and NTAPs for lender oversight and related functions in this rule, 
because no additional reporting is required. Furthermore, general 
oversight, suspension and revocation already existed in former Sec.  
120.716 and remains the same when relocated within subpart I, and no 
additional reporting is required by this rule.
7. Benefits and Costs for SBA and the Federal Government
    Benefits to SBA include improved administration of the lender 
oversight process through general consolidation of oversight authority 
within OCRM. SBA also benefits from having more timely and complete 
operations information, including financial information for SBA 
Supervised Lenders. In addition, the Agency benefits from further 
consolidated standards, enforcement grounds, ranges of enforcement 
actions and procedures for supervision and enforcement actions for many 
SBA Lenders, Microloan Intermediaries and NTAPs. Finally, the rule's 
additional requirements and lender oversight provisions provide 
improved and more timely Lender monitoring to ultimately further 
minimize the risks of losses in SBA's loan programs.
    For 7(a) Lender specific sections, no additional reporting from 
these Lenders is required by the rule, and therefore no additional 
direct costs for assessment of any such reporting are incurred by SBA 
for provisions related to oversight functions in this proposed rule.
    For SBLCs, the rule requires an additional 3 hours financial 
analyst time at a $55 hourly rate to the Federal government for each 
SBLC or 42 hours overall (3 x 14 SBLCs) for an additional annual cost 
of $2,310 to the Federal government.
    For NFRLs, the rule requires an additional 8 hours financial 
analyst time at a $55 hourly rate. Therefore, estimated annual cost to 
the Federal government related to oversight of all 58 NFRLs in 
accordance with this rule is 464 hours for $25,520.
    For CDCs, baseline costs remain unchanged for the Federal 
government. Baseline costs remain $14,850 (1 hr per CDC).
    For Microloan Intermediaries and NTAPs, no additional direct costs 
to SBA are incurred for the lender oversight functions and related 
provisions in this rule.
    Any additional indirect costs to the Federal government for 
oversight of the SBA Lenders, Microloan Intermediaries, and NTAPs under 
this rule are covered by the already-existing OCRM infra-structure.
8. Cost Basis
    For purposes of this rule, CPA and CFO salary rates used are based 
on information published by the AICPA for CPA-credentialed individuals 
(external auditor or internal CFO) estimated at $100. The salary rates 
for administrative professionals are based on information published by 
the International Association of Administrative Professionals. Internal 
SBA financial analyst time is estimated at GS-14 step 5 level of 
$99,203 plus 24.8% benefits allocation, or approximately $55 per hour.

D. Alternatives

    SBA believes that this rule is SBA's best available means for 
achieving its regulatory objective of incorporating coordinated risk-
based supervision and enforcement into SBA regulations and implementing 
the provisions of Public Law 108-447 and SBA's Delegation of Authority 
for lender oversight. SBA believes that there are no other potentially 
effective and reasonably feasible alternatives to this rule as it 
applies to SBA Lenders, Microloan Intermediaries, and NTAPs.
    Executive Order 13132: For the purposes of Executive Order 13132, 
the SBA determined that this rule has no federalism implications 
warranting preparation of a federalism assessment.

[[Page 75507]]

    Executive Order 12988: For the purposes of Executive Order 12988, 
Civil Justice Reform, SBA has determined that this rule is crafted, to 
the extent practicable, in accordance with the standards set forth in 
Sec. Sec.  3(a) and 3(b)(2), to minimize litigation, eliminate 
ambiguity, and reduce burden. This rule does not have retroactive or 
pre-emptive effect.
    Regulatory Flexibility Act: This rule directly affects all SBA 
Lenders, Microloan Intermediaries, and NTAPs. There are approximately 
4,500 7(a) Lenders, 270 CDCs, 250 Microloan Intermediaries, and there 
were 11 NTAPs participating with SBA funding when NTAPs were last 
funded. SBA has determined that CDCs, Microloan Intermediaries, and the 
14 SBLCs fall under the size standard for NAICS 522298, All Other 
Nondepository Credit Intermediation. The size standard for NAICS 522298 
is $7 million or less in average annual receipts. There are 
approximately 58 NFRLs, most of which fall in NAICS 522298 (the rest 
fall into NAICS 522110, Commercial Banking). The remaining 7(a) Lenders 
fall under the size standard for NAICS 522110, Commercial Banking. The 
size standard for NAICS 522110 is assets of $175 million or less. The 
NTAPs fall under the size standard for NAICS 541990, All Other 
Professional, Scientific and Technical Services. The size standard for 
NAICS 541990 is $7 million or less in average annual receipts.
    SBA estimates that over 95 percent of the CDCs and Microloan 
Intermediaries do not exceed the applicable size standard and are, 
therefore, considered small entities by this definition. Approximately 
half of all of the 7(a) Lenders exceed the small business size standard 
set for NAICS 522110. Thus, SBA has determined that this rule will have 
an impact on a substantial number of small entities. However, for the 
reasons explained following, SBA does not believe that the rule will 
have a significant economic impact on those entities.
    The rule contains several different sections. For clarity, SBA has 
analyzed the economic impact by section, as follows:
    A. Proposed Reporting Requirements for SBA Supervised Lenders and 
CDCs: There are 14 SBLCs and approximately 58 NFRLs that are authorized 
to make 7(a) loans. The majority of the NFRLs are nondepository 
commercial Lenders. Most of the NFRLs are classified under NAICS 
522298, which has a small business size standard of $7 million or less 
in annual revenues. The remaining NFRLs are classified under NAICS 
522110, Commercial Banking, which has a small business size standard of 
$175 million or less in assets.
    Current regulations require SBLCs to submit their audited financial 
statements to SBA within three months after the close of their fiscal 
year. Financial statement submission allows SBA to perform a size 
determination on SBLCs with a reasonable degree of accuracy. Based on 
submitted financial statements, of the twelve active SBLCs, four exceed 
the small business size standard for NAICS 522298.
    Presently, there is no requirement that NFRLs submit financial 
statements to SBA. Therefore, SBA does not have the information to 
determine current average annual receipts. To estimate the size of the 
NFRLs, SBA reviewed a sample of the financial statements that NFRLs had 
submitted to SBA when they first applied for authorization to make 7(a) 
loans. Based on a review of those financial statements, we estimate 
that two-thirds of the NFRLs are small. Based on the financial data in 
the NFRL applications and up-to-date financial data supplied by SBLCs 
to SBA, SBA believes that the rule impacts a substantial number of 
these small entities, but does not constitute a significant economic 
impact, as detailed below.
    The rule, which defines ``SBA Supervised Lenders'' as NFRLs and 
SBLCs, requires these Lenders to provide SBA with the following 
information: (1) Annual audited financial statements, (2) quarterly 
condition reports, (3) copies of any legal and administrative 
proceedings by or against the SBA Supervised Lender, (4) copies of any 
report furnished to its stockholders, (5) reports of changes in the SBA 
Supervised Lender's organization or financing, (6) reports of changes 
in the SBA Supervised Lender's financial condition, (7) notice of 
change in auditors, (8) notice of capital impairment, (9) capital 
restoration plans, (10) Other Regulated SBLC reports, (11) other 
reports (that SBA may require from time to time) and (12) 
certifications of compliance with capital requirement. Several of these 
are already required of SBLCs. The rule also provides for record 
retention requirements and recordkeeping of a capital adequacy plan.
    As is mentioned above, SBLCs are already required to submit audited 
annual financial statements to SBA. It has been SBA's experience that 
SBLCs and NFRLs also prepare quarterly financial statements on a 
regular basis for their own internal management purposes, and SBA 
believes that most of the NFRLs also prepare audited annual financial 
statements for their internal management purposes. The rule requires 
both NFRLs and SBLCs to provide the SBA with copies of their financial 
statements on a quarterly basis and expands the requirement for annual 
audited financial statements submitted to SBA to include NFRLs. 
Existing regulations also require SBLCs to maintain compliance with SBA 
capital requirements. The rule expands the number of firms subject to 
SBA's capital regulation by making NFRLs subject to certain capital 
regulations. The rule also requires SBA Supervised Lenders to provide 
SBA with a quarterly certification that they are in compliance with the 
SBA capital requirement. A certificate of compliance with SBA capital 
regulations would normally be prepared by a financial institution's 
chief financial officer or someone from his or her staff under the 
rule. SBA believes that it would take no more than one hour per quarter 
to prepare and certify. The certification could accompany quarterly 
condition reporting. In accordance with the American Institute of 
Public Accountants published surveys, the salary and benefits rate for 
a CPA-credentialed individual is estimated at $100 per hour. This 
computes to an estimated annual cost of $400 to cover the CFO's time. 
SBA has estimated that the administrative staff work involved in 
preparing the submission materials would take no more than one hour for 
those quarters not covered by the Annual Report. According to a recent 
survey published by the International Association of Administrative 
Professionals, the salary estimate is $30 per hour. This calculates to 
an annual expense of $120 per year. The combined annual expense that 
SBA Supervised Lenders would incur in order to comply with this 
reporting is on average $520 ($400 + $120). SBA does not believe that 
an additional $520 cost annually constitutes significant economic 
impact on any of these firms, which can routinely engage in financings 
in the million dollar range. Therefore, SBA certifies that this aspect 
of the rule does not have a significant economic impact on a 
substantial number of small entities.
    Current regulations require that SBLCs submit copies of the 
following to SBA: (1) Any legal and administrative proceedings by or 
against them, (2) any reports it furnishes to its stockholders, (3) 
summaries of changes in the SBLCs organization and financing, (4) 
notice of capital impairment, and (5) such other reports it is required 
by SBA to furnish on a specific matter. The rule extends to NFRLs these 
ad hoc reporting

[[Page 75508]]

requirements. SBA believes this data is likely already collected and 
that similar documents are already prepared by the NFRLs. The rule only 
requires the NFRLs to submit the documents to SBA. Because these are 
documents that are likely already in the possession of the NFRLs, SBA 
does not believe that the NFRLs would incur any significant costs to 
comply with the rule. SBA, therefore, certifies that this aspect of the 
rule does not have a significant economic impact on a substantial 
number of small entities.
    The new reporting and recordkeeping requirements in the rule for 
SBA Supervised Lenders that have not yet been discussed occur on an ad 
hoc basis (e.g., change in financial condition). They generally would 
be triggered by exceptional circumstances. Thus given their ad hoc and 
exceptional nature, they do not have a significant economic impact on a 
substantial number of small entities.
    The rule does not require any new financial or other reporting from 
CDCs. SBA certifies that this aspect of the rule does not have a 
significant economic impact on a substantial number of small entities.
    B. Capital Adequacy: Only SBLCs are presently subject to the 
minimum capital requirements currently found in 13 CFR 120.470. The 
rule requires quarterly compliance by SBLCs with their respective 
minimum capital requirements. It also requires that NFRLs provide the 
SBA with a quarterly certification that they are in compliance with 
their state regulator's minimum capital requirement. In addition, the 
rule broadens the existing definition of capital, making it more 
consistent with that of other Federal Financial Institution Regulators, 
by allowing SBA Supervised Lenders to count retained earnings towards 
their regulatory capital requirement. SBA asserts that broadening the 
types of capital that are eligible towards the SBA capital requirements 
has no adverse financial impact on small Lenders. In fact, allowing 
retained earnings to count toward an SBA Supervised Lender's regulatory 
capital allows those SBLCs with significant retained earnings on their 
balance sheet to increase the size of their 7(a) portfolio without 
necessitating any additional injection of permanent capital. SBA, 
therefore, certifies that this aspect of the rule does not have a 
significant economic impact on a substantial number of small entities.
    C. Enforcement Provisions: The rule consolidates and lists the 
types of, grounds for, and procedures governing SBA enforcement actions 
within consolidated enforcement regulations for all SBA Lenders, 
Microloan Intermediaries, and NTAPs. The enforcement provisions 
specific to SBA Supervised Lender specific and SBLC specific actions 
follow recent legislation codified at 15 U.S.C. 650 et seq. Because SBA 
anticipates that enforcement actions would occur on an exception basis, 
SBA does not anticipate that these provisions will have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. SBA, 
therefore, certifies that the rule does not have a significant impact 
on a substantial number of small entities.
    D. Bureau of PCLP Oversight: The Bureau of PCLP Oversight has been 
established in accordance with statutory guidance to address the LLRFs 
of Premier Certified Lenders (PCLP CDCs). Of the approximately 270 
CDCs, approximately 25 of them have PCLP authority. These are generally 
the larger CDCs, with portfolios which have a total outstanding 
portfolio balance of $7.9 billion. SBA, therefore, certifies that the 
rule's Bureau of PCLP Oversight provision does not have a significant 
impact on a substantial number of small entities.
    Paperwork Reduction Act: SBA has determined that this rule imposes 
additional reporting and recordkeeping requirements under the Paperwork 
Reduction Act, 44 U.S.C. Chapter 35. Specifically, SBA is revising OMB 
approved information collection number 3245-0077 to include NFRLs in 
SBA's current reporting requirements for SBLCs. SBA is also revising 
3245-0077 to add four reporting requirements for all SBA Supervised 
Lenders and one reporting requirement just for SBLCs. Finally, the rule 
adds a review/examination reporting requirement.
    SBA received several comments from the public on the information 
collections added by this rule, including several on the costs of 
complying with the new or expanded reporting requirements. SBA's 
responses to these comments are discussed in detail in the comment 
section of the preamble, and in the Executive Order 12866 regulatory 
impact analysis section. As a result of comments received, SBA has 
modified the proposed reporting requirements. Specifically, SBA will 
not require all CDCs to submit annual audited financial statements; 
rather, this requirement will continue to apply to only those CDCs with 
a loan portfolio balance of $20 million or more. All other proposed 
collections of information are adopted as proposed and have been 
submitted to OMB for final review and approval. The titles, authority, 
descriptions of respondents, descriptions of each information 
collection, needs and purposes for the collections, and the estimated 
annual cost and hour burdens imposed on Lenders as a result of these 
collections are outlined below.

I. SBA Supervised Lender Reporting and Recordkeeping Requirements

    OMB approved information collection number 3245-0077, Reports to 
SBA: Provisions of 13 CFR 120, is revised to include these additional 
reporting and recordkeeping requirements for SBA Supervised Lenders.
    Authority: SBA is authorized pursuant to 15 U.S.C. 650(a) and 15 
U.S.C. 634(b)(7) to collect this information associated with examining 
the safety and soundness of SBA Supervised Lenders.
    Description of Respondents: The respondents consist of all SBA 
Supervised Lenders. Currently there are approximately 75 such Lenders--
(14 SBLCs and 58 NFRLs).
    Statement of Needs and Purposes: The reports and recordkeeping 
requirements facilitate safety and soundness examinations and 
appropriate supervision of SBA's licensed SBLCs and NFRLs. Annual and 
interim financial information is analyzed by program management to 
timely assess SBA Supervised Lenders' financial strength, as well as 
compliance, with relevant program regulations (e.g., capital and SBLC 
licensing regulations). Other reporting requirements update program 
management on the operational status of the SBA Supervised Lender and 
timely notify SBA of (i) changes in structure, personnel, auditors, and 
financial condition and (ii) potential financial exposure. Informed, 
SBA as supervisor and guarantor of 50 to 85% of an SBA Supervised 
Lender's portfolio, can intervene (where appropriate) to protect the 
interests of the United States.
    Estimated Cost to Respondents: SBA estimated a cost of $10,340 per 
SBA Supervised Lender (or approximately $744,480 for all SBA Supervised 
Lenders) to comply with the below listed information collections. The 
$10,340 per SBA Supervised Lender includes $8,000 for the annual report 
audit (80 hours x $100 per hour) plus $2,340 for staff time to support 
the information collections (approximately 18 hours CFO time @ $100 per 
hour and 18 hours staff time @ $30 per hour). The hourly estimates are 
based on an informal survey of SBA Supervised Lenders. While a few of 
the information collections, like the annual and quarterly condition 
reports are required,

[[Page 75509]]

most are ad hoc and occur on an exception basis. The hourly costs are 
derived from salary and benefit rate surveys of the AICPA and 
International Association of Administrative Professionals. This 
$624,480 increase from the current OMB approved collection is mainly 
attributable to the extension of the information collection to the 58 
NFRLs; SBA also believes that this number will be dramatically reduced 
to the extent that many or some of the NFRLs already maintain this 
information for other purposes.

Description of Reporting and Recordkeeping Requirements

A. Annual Audit Report [No SBA Form Number]

    Summary: The Annual Audited Report primarily consists of an SBA 
Supervised Lender's annual audited financial statements. The Annual 
Report is due to SBA within three months after the SBA Supervised 
Lender's fiscal year end.

B. Legal and Administrative Proceedings [No SBA Form Number]

    Summary: Under proposed Sec.  120.464(a)(3), each SBA Supervised 
Lender submits a report of any legal or administrative proceeding, by 
or against the SBA Supervised Lender, or against any officer, director 
or employee of the SBA Supervised Lender for an alleged breach of 
official duty.

C. Stockholder Report [No SBA Form Number]

    Summary: Under Sec.  120.464(a)(4), all SBA Supervised Lenders are 
required to submit to SBA copies of any report or publications 
concerning financial operations furnished to their stockholders.

D. Report of Changes [No SBA Form Number]

    Summary: Under Sec.  120.464(a)(5), all SBA Supervised Lenders are 
required to submit a copy of any changes in the SBA Supervised Lender's 
organization or financing (e.g., change in type of organization, 
acquisition by or change of parent, change in primary financing entity, 
etc.).

E. Notice of Capital Impairment [No SBA Form Number]

    Summary: Section 120.462(d) requires all SBA Supervised Lenders to 
provide SBA prompt written notice of capital impairment.

F. Other Reports [No SBA Form Number]

    Summary: Section 120.464(a)(7) requires all SBA Supervised Lenders 
to submit such other reports as SBA may from time to time require by 
written directive.

G. Quarterly Condition Report and Certifications [No SBA Form Number]

    Summary: Under Sec.  120.464(a)(2), all SBA Supervised Lenders are 
required to submit a Quarterly Condition Report to SBA within 45 days 
following the end of each calendar quarter. The content of the 
Quarterly Condition Report includes the SBA Supervised Lender's interim 
financial statements, which may be internally prepared. SBA Supervised 
Lenders are required to apply uniform definitions to categories of 
nonperforming loans and recovery amounts on liquidated loans within the 
reports. The Quarterly Condition Report also contains a certification 
by the SBA Supervised Lender as to compliance with laws, completeness, 
and accuracy and may contain the certification as to capital 
requirement compliance.

H. Changes in Financial Condition Report [No SBA Form Number]

    Summary: Section 120.464(a)(6) requires SBA Supervised Lenders to 
file with SBA a report on any material change in financial condition 
within ten days after management becomes aware of the changes, except 
when reporting capital impairment under proposed Sec.  120.462(d).

I. Notice of Change in Auditor [No SBA Form Number]

    Summary: Section 120.463(d) requires SBA Supervised Lenders to 
notify SBA in writing if they discharge or change auditors.

J. Capital Restoration Plan [No SBA Form Number]

    Summary: Section 120.462(e) requires an SBA Supervised Lender to 
file a written capital restoration plan with SBA generally within 45 
days of the date the SBA Supervised Lender receives or is deemed to 
have received notice that it has not met its minimum capital 
requirement.

K. Other Regulated SBLC Report [No SBA Form Number]

    Summary: Sections 120.1510 and 120.1511 require an SBLC that is 
directly examined by a Federal Financial Institution Regulator or State 
banking regulator to certify to SBA in writing the extent to which its 
lending activities are subject to such regulation. It also requires 
such an Other Regulated SBLC to report to SBA on its interactions with 
its Federal Financial Institution Regulator or State banking regulator 
to the extent allowed by law.

L. Records Retention, In General

    Summary: Section 120.461(b) and (c) require SBA Supervised Lenders 
to maintain and preserve certain records with immediate availability of 
specific documents (e.g., general and subsidiary ledgers, general 
journals, bylaws, stock transfer ledgers). The provision provides for 
electronic preservation, if the original is available for retrieval 
within a reasonable period.

M. Capital Adequacy Plan

    Summary: Section 120.462 requires SBA Supervised Lenders' Board of 
Directors to determine capital adequacy goals and to establish, adopt, 
and maintain a capital plan.

II. SBA Lender, Microloan Intermediary, and NTAP Reporting Requirements

    These are new reporting and recordkeeping requirements.

A. Self-Assessment

    Authority: SBA is authorized to collect self-assessment information 
under 15 U.S.C. 634(b)(7) and 15 U.S.C. 650.
    Description of Respondents: The respondents are SBA Lenders, 
Microloan Intermediaries, and NTAPS.
    Need and Purpose: Section 120.1025 of this rule provides that ``SBA 
may conduct off-site reviews and monitoring * * * including SBA 
Lenders', Intermediaries', or NTAPs' self-assessments.'' Generally, SBA 
will consider requiring a self-assessment to confirm corrective actions 
implemented or in lieu of targeted or limited scope reviews. Self-
assessments are a cost effective means of overseeing and monitoring the 
SBA performance and compliance of SBA Lenders, Microloan 
Intermediaries, and NTAPs.
    Estimated Cost to Respondents: SBA estimates a cost of $430 per SBA 
Lender, Microloan Intermediary, or NTAP or $8,600 for all those 
required during a year to submit a self-assessment certification or 
self-assessment report. SBA estimates requiring 20 self-assessments a 
year. This cost would consist of $30 for administrative staff to 
prepare the self-assessment certification or report (one hour x $30 
hour) and $400 for CFO composition time (four hours x $100 per hour). 
The hourly estimates are based on an informal survey of SBA Lenders by 
OCRM financial analysts.

B. Corrective Action Plan

    Authority: SBA is authorized to collect this information under 15 
U.S.C. 634(b)(7) and 15 U.S.C. 650.

[[Page 75510]]

    Description of Respondents: The respondents consist of SBA Lenders, 
Microloan Intermediaries, and NTAPs that receive an onsite review or 
examination assessment of Acceptable With Corrective Actions Required 
or Less Than Acceptable, or as otherwise required by SBA.
    Need and Purpose: Section 120.1055 provides that SBA Lenders, 
Microloan Intermediaries, and NTAPs must submit proposed corrective 
action plans, if requested. The reports facilitate corrective action to 
address SBA Lender, Microloan Intermediary, or NTAP deficiencies 
identified generally during reviews and examinations.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.

0
For the reasons set forth above, SBA amends 13 CFR part 120 as follows:

PART 120--BUSINESS LOANS

0
1. The authority citation for part 120 is revised to read as follows:

    Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note, 
636(a), (h) and (m), 650, 687(f), 696(3), and 697(a) and (e).


0
2. Amend Sec.  120.10 by adding new definitions ``Acceptable Risk 
Rating'', ``Federal Financial Institution Regulator'', ``Lender 
Oversight Committee'', ``Less Than Acceptable Risk Rating'', 
``Management Official'', ``Non-Federally Regulated Lender'', ``Other 
Regulated SBLC'', ``Person'', ``Risk Rating'', ``SBA Lender'', ``SBA 
Supervised Lender'', and ``Small Business Lending Company'' in 
alphabetical order, and removing the definition for ``Lender'' and 
adding in its place a definition of ``Lender or 7(a) Lender'' to read 
as follows:


Sec.  120.10  Definitions.

* * * * *
    Acceptable Risk Rating is an SBA-assigned Risk Rating, currently 
defined by SBA as ``1'', ``2'' or ``3'' on a scale of 1 to 5, which 
represents an acceptable level of risk as determined by SBA, and which 
may be revised by SBA from time to time as published in the Federal 
Register through notice and comment.
* * * * *
    Federal Financial Institution Regulator is the federal banking 
regulator of a 7(a) Lender and may include the Federal Deposit 
Insurance Corporation, the Federal Reserve Board, the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision, the 
National Credit Union Administration, and the Farm Credit 
Administration.
* * * * *
    Lender or 7(a) Lender is an institution that has executed a 
participation agreement with SBA under the guaranteed loan program.
    Lender Oversight Committee is a committee within SBA, with 
responsibilities as outlined in Delegations of Authority, as published 
in the Federal Register.
    Less Than Acceptable Risk Rating is an SBA-assigned Risk Rating, 
currently defined by SBA as ``4'' or ``5'' on a scale of 1 to 5, which 
represents a higher level of risk as determined by SBA, and which may 
be revised by SBA from time to time as published in the Federal 
Register through notice and comment.
* * * * *
    Management Official is an officer, director, general partner, 
manager, employee participating in management, agent or other 
participant in the management of the affairs of the SBA Supervised 
Lender's activities under the 7(a) program.
    Non-Federally Regulated Lender (NFRL) is a business concern that is 
authorized by the SBA to make loans under section 7(a) and is subject 
to regulation by a state but whose lending activities are not regulated 
by a Federal Financial Institution Regulator.
* * * * *
    Other Regulated SBLC is a Small Business Lending Company whose SBA 
operations receive regular safety and soundness examinations by a state 
banking regulator or a Federal Financial Institution Regulator, and 
which meets the requirements set forth in Sec.  120.1511.
    Person is any individual, corporation, partnership, association, 
unit of government, or legal entity, however organized.
* * * * *
    Risk Rating is an SBA internal composite rating assigned to 
individual SBA Lenders, Intermediaries, or NTAPs that reflects the risk 
associated with the SBA Lender's or Intermediary's portfolio of SBA 
loans or with the NTAP. Risk Ratings currently range from one to five, 
with one representing the least risk and five representing the most 
risk, and may be revised by SBA from time to time as published in the 
Federal Register through notice and comment.
* * * * *
    SBA Lender is a 7(a) Lender or a CDC. This term includes SBA 
Supervised Lenders.
    SBA Supervised Lender is a 7(a) Lender that is either a Small 
Business Lending Company or a NFRL.
* * * * *
    Small Business Lending Company (SBLC) is a nondepository lending 
institution that is SBA licensed and is authorized by SBA to only make 
loans pursuant to section 7(a) of the Small Business Act and loans to 
Intermediaries in SBA's Microloan program. SBA has imposed a moratorium 
on licensing new SBLCs since January 1982.
* * * * *

0
3. Amend Sec.  120.410 by revising paragraphs (a), (d) and (e) and 
adding a new paragraph (f) to read as follows:


Sec.  120.410  Requirements for all participating Lenders.

* * * * *
    (a) Have a continuing ability to evaluate, process, close, 
disburse, service, liquidate and litigate small business loans 
including, but not limited to:
    (1) Holding sufficient permanent capital to support SBA lending 
activities (for SBA Lenders with a Federal Financial Institution 
Regulator, meeting capital requirements for an adequately capitalized 
financial institution is considered sufficient permanent capital to 
support SBA lending activities; for SBLCs, meeting its SBA minimum 
capital requirement; and for NFRLs, meeting its state minimum capital 
requirement); and
    (2) Maintaining satisfactory SBA performance, as determined by SBA 
in its discretion. The 7(a) Lender's Risk Rating, among other factors, 
will be considered in determining satisfactory SBA performance. Other 
factors may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission);
* * * * *
    (d) Be supervised and examined by either:
    (1) A Federal Financial Institution Regulator,
    (2) A state banking regulator satisfactory to SBA, or
    (3) SBA;
    (e) Be in good standing with SBA as defined in Sec.  120.420(f) 
(and determined by SBA in its discretion) and, as applicable, with an 
SBA Lender's state regulator and Federal Financial Institution 
Regulator; and
    (f) Operate in a safe and sound condition using commercially 
reasonable lending policies, procedures, and standards employed by 
prudent Lenders.

[[Page 75511]]


0
4. Remove the undesignated center heading immediately preceding Sec.  
120.414.


Sec.  120.414  [Removed]

0
5. Remove Sec.  120.414.


Sec.  120.415  [Removed]

0
6. Remove Sec.  120.415.

0
7. In Sec.  120.420, revise paragraph (f) introductory text and 
paragraphs (f)(3) and (4) to read as follows:


Sec.  120.420  Definitions.

* * * * *
    (f) Good Standing--In general, a Lender is in ``good standing'' 
with SBA if it:
* * * * *
    (3) Is not under investigation or indictment for, or has not been 
convicted of, or had a judgment entered against it for felony or fraud, 
or charges relating to a breach of trust or violation of a law or 
regulation protecting the integrity of business transactions or 
relationships, unless the Lender Oversight Committee has determined 
that good standing exists despite the existence of such factors.
    (4) Does not have any officer or employee who has been under 
investigation or indictment for, or has been convicted of or had a 
judgment entered against him for, a felony or fraud, or charges 
relating to a breach of trust or violation of a law or regulation 
protecting the integrity of business transactions or relationships, 
unless the Lender Oversight Committee has determined that good standing 
exists despite the existence of such person.
* * * * *
0
8. Amend Sec.  120.424 by revising paragraph (a), redesignating 
paragraphs (b), (c), (d), and (e) as (c), (d), (e), and (f), and adding 
new paragraph (b) to read as follows:


Sec.  120.424  What are the basic conditions a Lender must meet to 
securitize?

* * * * *
    (a) Be in good standing with SBA as defined in Sec.  120.420(f) of 
this chapter and determined by SBA in its discretion;
    (b) Have satisfactory SBA performance, as determined by SBA in its 
discretion. The Lender's Risk Rating, among other factors, will be 
considered in determining satisfactory SBA performance. Other factors 
may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission);
* * * * *


Sec.  120.425  [Amended]

0
9. Amend Sec.  120.425(c)(2) by removing ``SBA Securitization 
Committee'' and add in its place ``Lender Oversight Committee'' in the 
fourth sentence.


Sec.  120.426  [Amended]

0
10. Amend Sec.  120.426 by removing ``SBA's Securitization Committee'' 
and add in its place ``Lender Oversight Committee'' in the second 
sentence.

0
11. Amend Sec.  120.433 by revising paragraph (a), redesignating 
paragraph (b) as (c), and adding a new paragraph (b) to read as 
follows:


Sec.  120.433  What are the SBA's other requirements for sales and 
sales of participating interests?

* * * * *
    (a) The Lender must be in good standing with SBA as defined in 
Sec.  120.420(f) and determined by SBA in its discretion;
    (b) The Lender has satisfactory SBA performance, as determined by 
SBA in its discretion. The Lender's Risk Rating, among other factors, 
will be considered in determining satisfactory SBA performance. Other 
factors may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission); and
* * * * *

0
12. Amend Sec.  120.434 by revising paragraph (b), redesignating 
paragraphs (c), (d), (e), (f), and (g) as (d), (e), (f), (g), and (h), 
and adding a new paragraph (c) to read as follows:


Sec.  120.434  What are SBA's requirements for loan pledges?

* * * * *
    (b) The Lender must be in good standing with SBA as defined in 
Sec.  120.420(f) and determined by SBA in its discretion;
    (c) The Lender has satisfactory SBA performance, as determined by 
SBA in its discretion. The Lender's Risk Rating, among other factors, 
will be considered in determining satisfactory SBA performance. Other 
factors may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission);
* * * * *

0
13. Revise Sec.  120.435 introductory text to read as follows:


Sec.  120.435  Which loan pledges do not require notice to or consent 
by SBA?

    Notwithstanding the provisions of Sec.  120.434(e), 7(a) loans may 
be pledged for the following purposes without notice to or consent by 
SBA:
* * * * *


Sec.  120.442  [Removed]

0
14. Remove Sec.  120.442.

0
15. Amend Sec.  120.451 by revising the last sentence in paragraph (a), 
revising paragraph (b)(3), removing paragraph (c), redesignating 
paragraph (d) as (c), redesignating paragraph (e) as (d) and revising 
its last sentence, and adding a new paragraph (e) to read as follows:


Sec.  120.451  How does a Lender become a PLP Lender?

    (a) * * * The SBA field office will forward its recommendation to 
an SBA centralized loan processing center which will submit its 
recommendation and supporting documentation to the appropriate Office 
of Capital Access official in accordance with Delegations of Authority 
for final decision.
    (b) * * *
    (3) Has satisfactory SBA performance, as determined by SBA in its 
discretion. The Lender's Risk Rating, among other factors, will be 
considered in determining satisfactory SBA performance. Other factors 
may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission).
* * * * *
    (d) * * * The recertification decision is made by the appropriate 
Office of Capital Access official in accordance with Delegations of 
Authority and is final.
    (e) When a PLP Lender's Supplemental Guaranty Agreement expires, 
SBA may recertify the Lender as a PLP Lender for an additional term not 
to exceed two years. Prior to recertification, SBA will review a PLP 
Lender's loans, policies, procedures, SBA performance, Risk Rating, 
review or examination results, and other risk

[[Page 75512]]

related information as determined by SBA.
* * * * *


Sec.  120.454  [Removed]

0
16. Remove Sec.  120.454.


Sec.  120.455  [Removed]

0
17. Remove Sec.  120.455.

0
18. Add new undesignated center heading before Sec.  120.460 to read as 
follows:

SBA Supervised Lenders

0
19. Add new Sec.  120.460 to read as follows:


Sec.  120.460  What are SBA's additional requirements for SBA 
Supervised Lenders?

    (a) In general. In addition to complying with SBA's requirements 
for SBA Lenders, an SBA Supervised Lender must meet the additional 
requirements set forth in this regulation and the SBA Supervised Lender 
regulations that follow.
    (b) Operations and internal controls. Each SBA Supervised Lender's 
board of directors (or management, if the SBA Supervised Lender is a 
division of another company and does not have its own board of 
directors) must adopt an internal control policy which provides 
adequate direction to the institution in establishing effective control 
over and accountability for operations, programs, and resources. The 
internal control policy must, at a minimum:
    (1) Direct management to assign responsibility for the internal 
control function (covering financial, credit, credit review, 
collateral, and administrative matters) to an officer or officers of 
the SBA Supervised Lender;
    (2) Adopt and set forth procedures for maintenance and periodic 
review of the internal control function; and
    (3) Direct the operation of a program to review and assess the SBA 
Supervised Lender's assets. The asset review program policies must 
specify the following:
    (i) Loan, loan-related asset, and appraisal review standards, 
including standards for scope of selection for review (of any such 
loan, loan-related asset or appraisal) and standards for work papers 
and supporting documentation;
    (ii) Asset quality classification standards consistent with the 
standardized classification systems used by the Federal Financial 
Institution Regulators;
    (iii) Specific internal control requirements for the SBA Supervised 
Lender's major asset categories (cash and investment securities), 
lending, and the issuance of debt;
    (iv) Specific internal control requirements for the SBA Supervised 
Lender's oversight of Lender Service Providers; and
    (v) Standards for training to implement the asset review program.

0
20. Add new Sec.  120.461 to read as follows:


Sec.  120.461  What are SBA's additional requirements for SBA 
Supervised Lenders concerning records?

    (a) Report filing. All SBA Supervised Lender-specific reports 
(including all SBLC-only reports) must be filed with the appropriate 
Office of Capital Access official in accordance with Delegations of 
Authority.
    (b) Maintenance of records. An SBA Supervised Lender must maintain 
at its principal business office accurate and current financial 
records, including books of accounts, minutes of stockholder, 
directors, and executive committee meetings, and all documents and 
supporting materials relating to the SBA Supervised Lender's 
transactions. However, securities held by a custodian pursuant to a 
written agreement are exempt from this requirement.
    (c) Permanent preservation of records. An SBA Supervised Lender 
must permanently preserve in a manner permitting immediate (one 
business day) retrieval the following documentation for the financial 
statements and other reports required by Sec.  120.464 (and the 
accompanying certified public accountant's opinion):
    (1) All general and subsidiary ledgers (or other records) 
reflecting asset, liability, capital stock and additional paid-in 
capital, income, and expense accounts;
    (2) All general and special journals (or other records forming the 
basis for entries in such ledgers); and
    (3) The corporate charter, bylaws, application for determination of 
eligibility to participate with SBA, and all minutes books, capital 
stock certificates or stubs, stock ledgers, and stock transfer 
registers.
    (d) Other preservation of records. An SBA Supervised Lender must 
preserve for at least 6 years following final disposition of each 
individual SBA loan:
    (1) All applications for financing;
    (2) Lending, participation, and escrow agreements;
    (3) Financing instruments; and
    (4) All other documents and supporting material relating to such 
loans, including correspondence.
    (e) Electronic preservation. Records and other documents referred 
to in this section may be preserved electronically if the original is 
available for retrieval within 15 working days.

0
21. Add new Sec.  120.462 to read as follows:


Sec.  120.462  What are SBA's additional requirements on capital 
maintenance for SBA Supervised Lenders?

    (a) Capital adequacy. The board of directors (or management, if the 
SBA Supervised Lender is a division of another company and does not 
have its own board of directors) of each SBA Supervised Lender must 
determine capital adequacy goals; that is, the total amount of capital 
needed to assure the SBA Supervised Lender's continued financial 
viability and provide for any necessary growth. The minimum standards 
set in Sec.  120.471 for SBLCs and those established by state 
regulators for NFRLs are not to be adopted as the ideal capital level 
for a given SBA Supervised Lender. Rather, the minimum standards are to 
serve as minimum levels of capital that each SBA Supervised Lender must 
maintain to protect against the credit risk and other general risks 
inherent in its operation.
    (b) Capital plan. (1) The board of directors of each SBA Supervised 
Lender must establish, adopt, and maintain a formal written capital 
plan. The plan must include any interim capital targets that are 
necessary to achieve the SBA Supervised Lender's capital adequacy goals 
as well as the minimum capital standards. The plan must address any 
projected dividend goals, equity retirements, or any other anticipated 
action that may decrease the SBA Supervised Lender's capital. The plan 
must set forth the circumstances in which capital retirements (e.g., 
dividends, distributions of capital or purchase of treasury stock) can 
occur. In addition to factors described above that must be considered 
in meeting the minimum standards, the board of directors must also 
address the following factors in developing the SBA Supervised Lender's 
capital adequacy plan:
    (i) Management capability;
    (ii) Quality of operating policies, procedures, and internal 
controls;
    (iii) Quality and quantity of earnings;
    (iv) Asset quality and the adequacy of the allowance for loan 
losses within the loan portfolio;
    (v) Sufficiency of liquidity; and
    (vi) Any other risk-oriented activities or conditions that warrant 
additional capital (e.g., portfolio growth rate).
    (2) An SBA Supervised Lender must keep its capital plan current, 
updating it at least annually or more often as operating conditions may 
warrant.
    (c) Certification of compliance. Within 45 days of the end of each 
fiscal quarter, each SBA Supervised Lender

[[Page 75513]]

must furnish the SBA with a calculation of capital and certification of 
compliance with its minimum capital requirement as set forth in Sec.  
Sec.  120.471, 120.472, or 120.474, as applicable, for SBLCs and as 
established by state regulators for NFRLs. The SBA Supervised Lender's 
chief financial officer must certify the calculation to be correct. The 
quarterly calculation and certification of compliance may be included 
in the SBA Supervised Lender's Quarterly Condition Report.
    (d) Capital impairment. An SBA Supervised Lender must meet its 
minimum regulatory capital requirement and avoid capital impairment. 
Capital impairment exists if an SBA Supervised Lender fails to meet its 
minimum regulatory capital requirement under Sec. Sec.  120.471, 
120.472, and 120.474 for SBLCs or as established by state regulators 
for NFRLs. An SBA Supervised Lender must provide the appropriate Office 
of Capital Access official in accordance with Delegations of Authority 
written notice of any failure to meet its minimum capital requirement 
within 30 calendar days of the month-end in which the impairment 
occurred. Unless otherwise waived by the appropriate Office of Capital 
Access official in accordance with Delegations of Authority in writing, 
an SBA Supervised Lender may not present any loans to SBA for guaranty 
until the impairment is cured. SBA may waive the presentment 
prohibition for good cause as determined by SBA in its discretion. In 
the case of differences in calculating capital or capital requirements 
between the SBA Supervised Lender and SBA, SBA's calculations will 
prevail until differences between the two calculations are resolved.
    (e) Capital restoration plan. (1) Filing requirement. An SBA 
Supervised Lender must file a written capital restoration plan with SBA 
within 45 days of the date that the SBA Supervised Lender provides 
notice to SBA under paragraph (d) of this section or receives notice 
from SBA (whichever is earlier) that the SBA Supervised Lender has not 
met its minimum capital requirement, unless SBA notifies the SBA 
Supervised Lender in writing that the plan is to be filed within a 
different time period.
    (2) Plan content. An SBA Supervised Lender must detail the steps it 
will take to meet its minimum capital requirement; the time within 
which each step will be taken; the timeframe for accomplishing the 
entire capital restoration; and the person or department at the SBA 
Supervised Lender charged with carrying out the capital restoration 
plan.
    (3) SBA response. SBA will provide written notice of whether the 
capital restoration plan is approved or not or whether SBA will seek 
additional information. If the capital restoration plan is not approved 
by SBA, the SBA Supervised Lender will submit a revised capital 
restoration plan within the timeframe specified by SBA.
    (4) Amendment of capital restoration plan. An SBA Supervised Lender 
that has submitted an approved capital restoration plan may, after 
prior written notice to and approval by SBA, amend the plan to reflect 
a change in circumstance. Until such time as a proposed amendment has 
been approved, the SBA Supervised Lender must implement the capital 
restoration plan as approved prior to the proposed amendment.
    (5) Failure. If an SBA Supervised Lender fails to submit a capital 
restoration plan that is acceptable to SBA within its discretion within 
the required timeframe, or fails to implement, in any material respect 
as determined by SBA in its discretion, its SBA approved capital 
restoration plan within the plan timeframe, SBA may undertake 
enforcement actions under Sec.  120.1500.

0
22. Add new Sec.  120.463 to read as follows:


Sec.  120.463--Regulatory  accounting--What are SBA's regulatory 
accounting requirements for SBA Supervised Lenders?

    (a) Books and records. The books and records of an SBA Supervised 
Lender must be kept on an accrual basis in accordance with Generally 
Accepted Accounting Principles (GAAP) as promulgated by the Financial 
Accounting Standards Board (FASB), supplemented by Regulatory 
Accounting Principles (RAP) as identified by SBA in Policy, Procedural 
or Information Notices, from time to time.
    (b) Annual audit. Each SBA Supervised Lender must have its 
financial statements audited annually by a certified public accountant 
experienced in auditing financial institutions. The audit must be 
performed in accordance with generally accepted auditing standards as 
adopted by the Auditing Standards Board of the American Institute of 
Certified Public Accountants (AICPA) for non-public companies and by 
the Public Company Accounting Oversight Board (PCAOB) for public 
companies. Annually, the auditor must issue an audit report with an 
opinion as to the fairness of the SBA Supervised Lender's financial 
statements and their compliance with GAAP.
    (c) Auditor qualifications. The audit shall be conducted by an 
independent certified public accountant who:
    (1) Is registered or licensed to practice as a certified public 
accountant, and is in good standing, under the laws of the state or 
other political subdivision of the United States in which the SBA 
Supervised Lender's principal office is located;
    (2) Agrees in the engagement letter with the SBA Supervised Lender 
to provide the SBA with access to and copies of any work papers, 
policies, and procedures relating to the services performed;
    (3)(i) Is in compliance with the AICPA Code of Professional 
Conduct; and
    (ii) Meets the independence requirements and interpretations of the 
Securities and Exchange Commission and its staff;
    (4) Has received a peer review or is enrolled in a peer review 
program, that meets AICPA guidelines; and
    (5) Is otherwise acceptable to SBA.
    (d) Change of auditor. If an SBA Supervised Lender discharges or 
changes its auditor, it must notify SBA in writing within ten days of 
the occurrence. Such notification must provide:
    (1) The name, address, and telephone number of the discharged 
auditor; and
    (2) If the discharge/change involved a dispute over the financial 
statements, a reasonably detailed statement of all the reasons for the 
discharge or change. This statement must set out the issue in dispute, 
the position of the auditor, the position of the SBA Supervised Lender, 
and the effect of each position on the balance sheet and income 
statement of the SBA Supervised Lender.
    (e) Specific accounting requirements. (1) Each SBA Supervised 
Lender must maintain an allowance for losses on loans and other assets 
that is sufficient to absorb all probable and estimated losses that may 
reasonably be expected based on the SBA Supervised Lender's historical 
performance and reasonably-anticipated events. Each SBA Supervised 
Lender must maintain documentation of its loan loss allowance 
calculations and analysis in sufficient detail to permit the SBA to 
understand the assumptions used and the application of those 
assumptions to the assets of the SBA Supervised Lender.
    (2) The unguaranteed portions of loans determined to be 
uncollectible must be charged-off promptly. If the portion determined 
to be uncollectible by the SBA Supervised Lender is different from the 
amount determined

[[Page 75514]]

by its auditors or the SBA, the SBA Supervised Lender must charge-off 
such amount as the SBA may direct.
    (3) Each SBA Supervised Lender must classify loans as:
    (i) ``Nonaccrual,'' if any portion of the principal or interest is 
determined to be uncollectible and
    (ii) ``Formally restructured,'' if the loan meets the ``troubled 
debt restructuring'' definition set forth in FASB Statement of 
Financial Accounting Standards No. 15, Accounting by Debtors and 
Creditors for Troubled Debt Restructurings.
    (4) When one loan to a borrower is classified as nonaccrual or 
formally restructured, all loans to that borrower must be so classified 
unless the SBA Supervised Lender can document that the loans have 
independent sources of repayment.
    (f) Valuing loan servicing rights and residual interests. Each SBA 
Supervised Lender must account for loan sales transactions and the 
valuation of loan servicing rights in accordance with GAAP. At the end 
of each quarter, the SBA Supervised Lender must review for 
reasonableness the existing environmental assumptions used in the 
valuation. Particular attention must be given to interest rate and 
repayment rate assumptions. Assumptions considered no longer reasonable 
must be modified and modifications must be reflected in the valuation 
and must be documented and supported by a market analysis. Work papers 
reflecting the analysis of assumptions and any resulting adjustment in 
the valuation must be maintained for SBA review in accordance with 
Sec.  120.461. SBA may require an SBA Supervised Lender to use industry 
averages for the valuation of servicing rights.

0
23. Add new Sec.  120.464 to read as follows:


Sec.  120.464  Reports to SBA.

    (a) An SBA Supervised Lender must submit the following to SBA:
    (1) Annual Report. Within three months after the close of each 
fiscal year, each SBA Supervised Lender must submit to SBA two copies 
of an annual report including audited financial statements as prepared 
by a certified public accountant in accordance with Sec.  120.463. 
Specifically, the annual report must, at a minimum, include the 
following:
    (i) Audited balance sheet;
    (ii) Audited statement of income and expense;
    (iii) Audited reconciliation of capital accounts;
    (iv) Audited source and application of funds;
    (v) Such footnotes as are necessary to an understanding of the 
report;
    (vi) Auditor's letter to management on internal control weaknesses; 
and
    (vii) The auditor's report.
    (2) Quarterly Condition Reports. By the 45th calendar day following 
the end of each calendar quarter, each SBA Supervised Lender must 
submit a Quarterly Condition Report in a form and content as the SBA 
may prescribe from time to time. At a minimum, the Quarterly Condition 
Report must include the SBA Supervised Lender's quarterly financial 
statements, which may be internally prepared. The SBA Supervised Lender 
must apply uniform definitions to categories of nonperforming loans and 
include recovery amounts on liquidated loans. SBA may, on a case-by-
case basis, depending on an SBA Supervised Lender's size and the 
quality of its assets, adjust the requirements for content and 
frequency of filing Quarterly Condition Reports.
    (3) Legal and Administrative Proceeding Report. Each SBA Supervised 
Lender must report any legal or administrative proceeding by or against 
the SBA Supervised Lender, or against any officer, director or employee 
of the SBA Supervised Lender for an alleged breach of official duty, 
within ten business days after initiating or learning of the 
proceeding, and also must notify the SBA of the terms of any settlement 
or final judgment. The SBA Supervised Lender must include such 
information in any reporting required under other provisions of SBA 
regulations.
    (4) Stockholder Reports. Each SBA Supervised Lender must submit to 
SBA a copy of any report furnished to its stockholders in any manner, 
within 30 calendar days after submission to stockholders, including any 
prospectus, letter, or other document, concerning the financial 
operations or condition of the SBA Supervised Lender.
    (5) Reports of Changes. Each SBA Supervised Lender must submit to 
SBA a summary of any changes in the SBA Supervised Lender's 
organization or financing (within 30 calendar days of the change), such 
as:
    (i) Any change in its name, address or telephone number;
    (ii) Any change in its charter, bylaws, or its officers or 
directors (to be accompanied by a statement of personal history on the 
form approved by SBA);
    (iii) Any change in capitalization, including such types of change 
as are identified in this part 120;
    (iv) Any changes affecting an SBA Supervised Lender's eligibility 
to continue to participate as an SBA Supervised Lender; and
    (v) Notice of any pledge of stock (within 30 calendar days of the 
transaction) if 10 percent or more of the stock is pledged by any 
person (or group of persons acting in concert) as collateral for 
indebtedness.
    (6) Report of Changes in Financial Condition. In addition to other 
reports required under this part 120, each SBA Supervised Lender must 
submit a report to SBA on any material change in financial condition. 
The SBA Supervised Lender must submit such report promptly, but no 
later than ten days after its management becomes aware of such change 
(except as provided for in Sec.  120.462(d)). Failure to promptly 
notify SBA concerning a material change in financial condition may lead 
to enforcement action.
    (7) Other Reports. Each SBA Supervised Lender must submit such 
other reports as SBA from time to time may in writing require.
    (b) Preparing financial reports for filing. Each SBA Supervised 
Lender must prepare financial reports:
    (1) In accordance with all applicable laws, regulations, 
procedures, standards, and such instructions and specifications and in 
such form and media format as may be prescribed by SBA from time to 
time;
    (2) On an accrual basis, in accordance with GAAP principles and 
such other accounting requirements, standards, and procedures as may be 
prescribed by the SBA from time to time;
    (3) That contain all applicable footnotes in accordance with GAAP 
principals, one of which includes a brief analysis of how the SBA 
Supervised Lender complies with SBA's capital regulations, as 
applicable; and
    (4) In such manner as to facilitate the reconciliation of these 
reports with the books and records of the SBA Supervised Lender.
    (c) Responsibility for assuring the accuracy of filed financial 
reports. Each financial report filed with SBA must be certified as 
having been prepared in accordance with all applicable regulations, 
SOPs, notices, and instructions and to be a true, accurate, and 
complete representation of the financial condition and financial 
performance of the SBA Supervised Lender to which it applies. The 
reports must be certified by the officer of the reporting SBA 
Supervised Lender named for that purpose by action of the institution's 
board of directors. If the institution's board of directors has not 
acted to name an officer to certify the correctness of its reports of 
financial condition and financial performance,

[[Page 75515]]

then the reports must be certified by the president or chief executive 
officer of the reporting SBA Supervised Lender.
    (d) Waiver. The appropriate Office of Capital Access official in 
accordance with Delegations of Authority may in his/her discretion 
waive any Sec.  120.464 reporting requirement for SBA Supervised 
Lenders for good cause (including, but not limited to, where an SBA 
Supervised Lender has a relatively small SBA loan portfolio), as 
determined by SBA. SBA Supervised Lenders must request the waiver in 
writing and include all supporting reasons and documentation. The 
waiver decision of the appropriate Office of Capital Access official in 
accordance with Delegations of Authority is final.

0
24. Add new Sec.  120.465 to read as follows:


Sec.  120.465  Civil penalty for late submission of required reports.

    (a) Obligation to submit required reports by applicable due dates. 
SBA Supervised Lenders must submit complete reports by the due dates 
described in the regulations or as directed in writing by SBA. SBA 
considers any report that an SBA Supervised Lender sends to SBA by the 
applicable due date but that is submitted only in part, to have not 
been submitted by the applicable due date. SBA also considers any 
report that is postmarked by the due date to be submitted by the due 
date.
    (b) Amount of civil penalty. For each day past the due date for 
such report, the SBA Supervised Lender must pay to SBA a civil penalty 
of not more than $5,000 per day per report. Such civil penalty 
continues to accrue until and including the date upon which SBA 
Supervised Lender submits the complete report. In determining the 
amount of the civil penalty to be assessed, SBA may consider the 
financial resources and good faith of the SBA Supervised Lender, the 
gravity of the violation, the history of previous violations and any 
such other matters as justice may require.
    (c) Notification of amount of civil penalty. SBA will notify the 
SBA Supervised Lender in writing of the amount of civil penalties 
imposed either upon receiving the required complete report or at such 
other time as SBA determines. The SBA Supervised Lender must pay this 
amount to SBA within 30 days of the date of SBA's written demand.
    (d) Identification during examination. SBA may also impose on an 
SBA Supervised Lender a civil penalty as described in this section if 
SBA discovers, during an examination pursuant to subpart I of this Part 
120 or otherwise, that the SBA Supervised Lender did not submit a 
required report by the due date.
    (e) Extensions of submission due dates. (1) An SBA Supervised 
Lender may request in writing to SBA that SBA extend its report due 
date. The request must reference the report and its due date, state the 
reasonable cause for extension, and assert how much additional time is 
needed in order to submit a complete report. SBA will advise SBA 
Supervised Lender in writing as to whether it approved or denied the 
extension request. If SBA determines that there is reasonable cause to 
grant an extension and it is not due to willful neglect, SBA will 
establish a new due date. Such determination as to willful neglect and 
reasonable cause is in SBA's discretion. SBA will consider the 
following factors in determining willful neglect:
    (i) Whether the SBA Supervised Lender failed to file required 
reports for more than two reporting periods and
    (ii) If SBA provided the SBA Supervised Lender notice of the 
failure to file and the SBA Supervised Lender failed to respond or 
failed to provide a reasonable explanation for the filing failure in 
its response.
    (2) If SBA disapproves the extension, the due date remains the 
same. The civil penalty accrues regardless of whether the SBA 
Supervised Lender files an extension request. If SBA approves the 
extension, SBA will waive the civil penalty that has accrued so far for 
that particular report. However, a new civil penalty will accrue if the 
SBA Supervised Lender does not submit a complete report by the new due 
date established by SBA.
    (f) Requests for reduction or exemption. (1) An SBA Supervised 
Lender may request a reduction or exemption from the civil penalty in 
writing to SBA. The request must reference the required report, its due 
date and the amount sought for reduction, and state in detail the 
reasons for the reduction. SBA will consider the following factors:
    (i) Whether there is reasonable cause for failure to file timely 
and it was not due to willful neglect;
    (ii) Whether the SBA Supervised Lender has demonstrated to SBA's 
satisfaction that it has modified its internal procedures to comply 
with reporting requirements in the future; and
    (iii) Whether the SBA Supervised Lender has demonstrated to SBA's 
satisfaction, based on financial information fully disclosed together 
with its request, that it would have difficulty paying the civil 
penalty assessed.
    (2) SBA must also determine that a reduction or exemption is not 
inconsistent with the public interest or the protection of SBA.
    (3) SBA may in writing approve the exemption, reduce the civil 
penalty, or deny the exemption.
    (4) If SBA grants the reduction request or denies the reduction or 
exemption, the SBA Supervised Lender must pay the amount owed within 30 
days of the letter date. Civil penalties will accrue while the request 
is pending.
    (g) Reconsideration of decisions. An SBA Supervised Lender may 
request in writing to the Associate Administrator for Capital Access 
(AA/CA) to reconsider its request for extension, reduction, or 
exemption. The reconsideration request must be received by SBA within 
30 days of the date of the letter denying the SBA Supervised Lender's 
original request. SBA will not consider untimely requests. The SBA 
Supervised Lender must include any additional information or 
documentation to support its reconsideration request. SBA will issue a 
written decision on the reconsideration request. The decision is a 
final agency decision. If on reconsideration, a civil penalty remains 
due, the SBA Supervised Lender must pay to SBA the civil penalty within 
30 days of the written decision or as otherwise directed. Civil 
penalties will continue to accrue while the reconsideration request is 
pending.
    (h) Other enforcement actions. SBA may seek additional remedies for 
failure to timely file reports as authorized by law.
    (i) Exception for affiliate of SBLC. Civil penalties under this 
section do not apply to any affiliate of an SBLC that procures at least 
10% of its annual purchasing requirements from small manufacturers.

0
25. Revise Sec.  120.470 to read as follows:


Sec.  120.470  What are SBA's additional requirements for SBLCs?

    In addition to complying with SBA's requirements for SBA Lenders 
and SBA Supervised Lenders, an SBLC must meet the requirements 
contained in this regulation and the SBLC regulations that follow.
    (a) Lending. An SBLC may only make:
    (1) Loans under section 7(a) (except section 7(a)(13) of the Act in 
participation with SBA); and/or
    (2) SBA guaranteed loans to Intermediaries (see subpart G of this 
part). Such loans are subject to the same

[[Page 75516]]

conditions as guaranteed loans made to Intermediaries by 7(a) Lenders.
    (b) Business structure. An SBLC must be a corporation (profit or 
non-profit) or a limited liability company or limited partnership.
    (c) Written agreement. An SBLC must sign a written agreement with 
SBA.
    (d) Dual control. An SBLC must maintain dual control over 
disbursement of funds and withdrawal of securities.
    (1) An SBLC may disburse funds only by checks or wire transfers 
authorized by signatures of two or more officers covered by the SBLC's 
fidelity bond, except that checks in an amount of $1,000 or less may be 
signed by one bonded officer, provided that such action is permitted 
under the SBLC's fidelity bond.
    (2) There must be two or more bonded officers, or one bonded 
officer and a bonded employee to open safe deposit boxes or withdraw 
securities from safekeeping. The SBLC must furnish to each depository 
bank, custodian, or entity providing safe deposit boxes a certified 
copy of the resolution implementing control procedures.
    (e) Fidelity insurance. An SBLC must maintain a Brokers Blanket 
Bond, Standard Form 14, or Finance Companies Blanket Bond, Standard 
Form 15, or such other form of coverage as SBA may approve, in a 
minimum amount of $2,000,000 executed by a surety holding a certificate 
of authority from the Secretary of the Treasury pursuant to 31 U.S.C. 
9304-9308.
    (f) Common control. (1) An SBLC must not control, be controlled by, 
or be under common control with another SBLC.
    (2) In the case of a purchase of an SBLC by an organization that 
already owns an SBLC, the purchasing entity will have six months to 
submit a plan to SBA for the divestiture of one of the SBLCs. All 
divestiture plans must be approved by SBA and SBA may withhold approval 
in its discretion. Divestiture of the SBLC must occur within one year 
of purchase date.
    (3) Without prior written SBA approval, an Associate of one SBLC 
must not be an Associate of another SBLC or of any entity which 
directly or indirectly controls, or is under common control with, 
another SBLC.
    (4) For purposes of paragraph (f) of this section, common control 
means a condition where two or more SBLCs, either through ownership, 
management, contract, or otherwise, are under the Control of one group 
or Person (as defined in Sec.  120.10 of this chapter). Two or more 
SBLCs are presumed to be under common control if they are Affiliates of 
each other by reason of common ownership or common officers, directors, 
or general partners.
    (5) ``Affiliate'' has the meaning set forth in Sec.  121.103 of 
this chapter.
    (6) ``Control'' means the possession, direct or indirect, of the 
power to direct or cause the direction of the management and policies 
of an SBLC or other concern, whether through the ownership of voting 
securities, by contract, or otherwise. The common control presumption 
may be rebutted by evidence satisfactory to SBA.
    (g) Management. An SBLC must employ full time professional 
management.
    (h) Borrowed funds. In general, an SBLC may not be capitalized with 
borrowed funds. Shareholders owning 10 percent or more of any class of 
its stock must not use personally-borrowed funds to purchase the stock 
unless the net worth of the shareholder is at least twice the amount 
borrowed or unless the shareholder receives SBA's prior written 
approval for a lower ratio.

0
26. Revise Sec.  120.471 to read as follows:


Sec.  120.471  What are the minimum capital requirements for SBLCs?

    (a) Minimum capital requirements. Each SBLC must maintain, at a 
minimum, unencumbered paid-in capital and paid-in surplus of at least 
$1,000,000, or ten percent of the aggregate of its share of all 
outstanding loans, whichever is more.
    (b) Composition of capital. For purposes of complying with 
paragraph (a) of this section, capital consists only of one or more of 
the following:
    (1) Common stock;
    (2) Preferred stock that is noncumulative as to dividends and does 
not have a maturity date;
    (3) Additional paid-in capital representing amounts paid for stock 
in excess of the par value;
    (4) Retained earnings of the business; and/or
    (5) For limited liability companies and limited partnerships, 
capital contributions must not be subject to repayment at any specific 
time, must not be subject to withdrawal and must have no cumulative 
priority return.
    (c) Voluntary capital reduction. Without prior written SBA 
approval, an SBLC must not voluntarily reduce its capital, or 
repurchase and hold more than 2 percent of any class or combination of 
classes of its stock.
    (d) Issuance of securities. Without prior written SBA approval, an 
SBLC must not issue any securities (including stock options and debt 
securities) except stock dividends.

0
27. Revise Sec.  120.472 to read as follows:


Sec.  120.472  Higher individual minimum capital requirement.

    The Associate Administrator for Capital Access (AA/CA) may require, 
under Sec.  120.473(d), an SBLC to maintain a higher level of capital, 
if the AA/CA determines, in his/her discretion, that the SBLC's level 
of capital is potentially inadequate to protect the SBA from loss due 
to the financial failure of the SBLC. The factors to be considered in 
the determination will vary in each case and may include, for example:
    (a) Specific conditions or circumstances pertaining to the SBLC;
    (b) Exigency of those circumstances or potential problems;
    (c) Overall condition, management strength, and future prospects of 
the SBLC and, if applicable, its parent or affiliates;
    (d) The SBLC's liquidity and existing capital level, and the 
performance of its SBA loan portfolio;
    (e) The management views of the SBLC's directors and senior 
management; and
    (f) Other risk-related factors, as determined by SBA.


Sec.  120.476  [Removed]

0
28. Remove Sec.  120.476.


Sec. Sec.  120.473, 120.474, and 120.475  [Redesignated as Sec. Sec.  
120.475, 120.476, and 120.490]

0
29. Redesignate Sec. Sec.  120.473, 120.474, and 120.475 as Sec. Sec.  
120.475, 120.476, and 120.490, respectively.

0
30. In newly redesignated Sec.  120.475, revise the second sentence of 
paragraph (a) introductory text and revise paragraph (b) to read as 
follows:


Sec.  120.475  Change of ownership or control.

    (a) * * * An SBLC must request approval of any such change from the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority. * * *
* * * * *
    (b) If transfer of ownership or control is subject to the approval 
of any State or Federal chartering, licensing, or other regulatory 
authority, copies of any documents filed with such authority must, at 
the same time, be transmitted to the appropriate Office of Capital 
Access official in accordance with Delegations of Authority.

0
31. Add new Sec.  120.473 to read as follows:


Sec.  120.473  Procedures for determining individual minimum capital 
requirement.

    (a) Notice. When SBA determines that an individual minimum capital

[[Page 75517]]

requirement above that set forth in this subpart or other legal 
authority is necessary or appropriate for a particular SBLC, SBA will 
notify the SBLC in writing of the proposed individual minimum capital 
requirement, the date by which it should be reached and will provide an 
explanation of why the requirement proposed is considered necessary or 
appropriate.
    (b) SBLC response. The SBLC may respond to the notice. The response 
should include any matters which the SBLC would have SBA consider in 
deciding whether individual minimum capital requirements should be 
established for the SBLC, what those capital requirements should be, 
and, if applicable, when they should be achieved. The response must be 
in writing and delivered to the AA/CA within 30 days after the date on 
which the SBLC received the notice. SBA may shorten the time for 
response when, in the opinion of SBA, the condition of the SBLC so 
warrants, provided that the SBLC is informed promptly of the new time 
period, or the SBLC consents to the shortening of its response time. In 
its discretion, SBA may extend the time period for good cause.
    (c) Failure to respond. An SBLC that does not respond within 30 
days or such other time period as may be specified by SBA will have 
waived any objections to the proposed minimum capital requirement and 
the deadline for its achievement. Failure to respond will also 
constitute consent to the individual minimum capital requirement.
    (d) Decision. After the close of the SBLC's response period, the 
AA/CA will decide, based on a review of SBA reasons for proposing the 
individual minimum capital requirement, the SBLC's response, and other 
information concerning the SBLC, whether the individual minimum capital 
requirement should be established for the SBLC and, if so, the 
requirement and the date it will become effective. The SBLC will be 
notified of the decision in writing. The notice will include an 
explanation of the decision; except for a decision not to establish an 
individual minimum capital requirement for the SBLC.
    (e) Submission of plan. The decision may require the SBLC to 
develop and submit to SBA, within a time period specified, an 
acceptable plan to reach the individual minimum capital requirement by 
the date required.
    (f) Change in circumstances. If, after SBA's decision in paragraph 
(d) of this section, there is a change in the circumstances affecting 
the SBLC's capital adequacy or its ability to reach the required 
individual minimum capital requirement by the specified date, either 
the SBLC or the AA/CA may propose to the other a change in the 
individual minimum capital requirement for the SBLC, the date when the 
individual minimum must be achieved, and/or the SBLC's plan (if 
applicable). The AA/CA may decline to consider proposals that are not 
based on a significant change in circumstances or are repetitive or 
frivolous. Pending a decision by the AA/CA on reconsideration, SBA's 
original decision and any plan required under that decision will 
continue in full force and effect.

0
32. Add new Sec.  120.474 to read as follows:


Sec.  120.474  Relation to other actions.

    In lieu of, or in addition to, the procedures in this subpart, the 
individual minimum capital requirement for an SBLC may be established 
or revised through a written agreement or cease and desist proceedings 
under subpart I of this part.

0
33. Amend Sec.  120.630 by adding paragraph (a)(5) to read as follows:


Sec.  120.630  Qualifications to be a Pool Assembler.

    (a) * * *
    (5) For any pool assembler that is an SBA Lender, that the SBA 
Lender has satisfactory SBA performance, as determined by SBA in its 
discretion. The Lender's Risk Rating, among other factors, will be 
considered in determining satisfactory SBA performance. Other factors 
may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission).
* * * * *

0
34. Revise Sec.  120.702(b) to read as follows:


Sec.  120.702  Are there limitations on who can be an Intermediary or 
on where an Intermediary may operate?

* * * * *
    (b) Limitation to one state. An Intermediary may not operate in 
more than one state unless the appropriate Office of Capital Access 
official in accordance with Delegations of Authority determines that it 
would be in the best interests of the small business community for it 
to operate across state lines.
* * * * *

0
35. Amend Sec.  120.710 by revising paragraphs (c), (d), the 
introductory text of paragraph (e) and paragraph (e)(1) to read as 
follows:


Sec.  120.710  What is the Loan Loss Reserve Fund?

* * * * *
    (c) SBA review of Loan Loss Reserve Fund. After an Intermediary has 
been in the Microloan program for five years, it may request SBA's 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority to reduce the percentage of its Portfolio 
which it must maintain in its LLRF to an amount equal to the actual 
average loan loss rate during the preceding five-year period. Upon 
receipt of such request, he/she will review the Intermediary's annual 
loss rate for the most recent five-year period preceding the request.
    (d) Reduction of Loan Loss Reserve Fund. The appropriate Office of 
Capital Access official in accordance with Delegations of Authority has 
the authority to reduce the percentage of an Intermediary's Portfolio 
that it must maintain in its LLRF to an amount equal to the actual 
average loan loss rate during the preceding five-year period. The 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority cannot reduce the LLRF to less than ten 
percent of the Portfolio.
    (e) What must an intermediary demonstrate to get a reduction in 
Loan Loss Reserve Fund? To receive a reduction in its LLRF, an 
Intermediary must:
    (1) Have satisfactory SBA performance, as determined by SBA in its 
discretion. The Intermediary's Risk Rating, among other factors, will 
be considered in determining satisfactory SBA performance. Other 
factors may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission); and
* * * * *


Sec.  120.716  [Removed]

0
36. Remove Sec.  120.716.

0
37. Amend Sec.  120.812 to add three new sentences at the end of 
paragraph (c) to read as follows:


Sec.  120.812  Probationary period for newly certified CDCs.

* * * * *
    (c) * * * To be considered for permanent CDC status or an extension 
of probation, the CDC must have

[[Page 75518]]

satisfactory SBA performance, as determined by SBA in its discretion. 
The CDC's Risk Rating, among other factors, will be considered in 
determining satisfactory SBA performance. Other factors may include, 
but are not limited to, on-site review/examination assessments, 
historical performance measures (like default rate, purchase rate and 
loss rate), loan volume to the extent that it impacts performance 
measures, and other performance related measurements and information 
(such as contribution toward SBA mission).
* * * * *

0
38. Amend Sec.  120.820 to add a new paragraph (c) to read as follows:


Sec.  120.820  CDC non-profit status and good standing.

* * * * *
    (c) Must have satisfactory SBA performance, as determined by SBA in 
its discretion. The CDC's Risk Rating, among other factors, will be 
considered in determining satisfactory SBA performance. Other factors 
may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission).
0
39. Revise Sec.  120.826 to read as follows:


Sec.  120.826  Basic requirements for operating a CDC.

    A CDC must operate in accordance with the following requirements:
    (a) In general. CDCs must meet all 504 Loan Program Requirements. 
In its Area of Operations, a CDC must market the 504 program, package 
and process 504 loan applications, close and service 504 loans, and if 
authorized by SBA, liquidate and litigate 504 loans. It must supply to 
SBA current and accurate information about all certification and 
operational requirements, and maintain the records and submit all 
reports required by SBA.
    (b) Operations and internal controls. Each CDC's board of directors 
must adopt an internal control policy which provides adequate direction 
to the institution for effective control over and accountability for 
operations, programs, and resources. The board adopted internal control 
policy must, at a minimum:
    (1) Direct management to assign the responsibility for the internal 
control function (covering financial, credit, credit review, 
collateral, and administrative matters) to an officer or officers of 
the CDC;
    (2) Adopt and set forth procedures for maintenance and periodic 
review of the internal control function;
    (3) Direct the operation of a program to review and assess the 
CDC's 504-related loans. For the 504 review program, the internal 
control policies must specify the following:
    (i) Loan, loan-related collateral, and appraisal review standards, 
including standards for scope of selection (for review of any such 
loan, loan-related collateral or appraisal) and standards for work 
papers and supporting documentation;
    (ii) Loan quality classification standards consistent with the 
standardized classification systems used by the Federal Financial 
Institution Regulators;
    (iii) Specific control requirements for the CDC's oversight of 
Lender Service Providers; and
    (iv) Standards for training to implement the loan review program; 
and
    (4) Address other control requirements as may be established by 
SBA.
    (c) Annual Audited/Reviewed Financial Statements. Each CDC with a 
504 loan portfolio balance of $20 million or more (as calculated by 
SBA) must have its financial statements audited annually by a certified 
public accountant that is independent and experienced in auditing 
financial institutions. The audit must be performed in accordance with 
generally accepted auditing standards as adopted by the Auditing 
Standards Board of the American Institute of Certified Public 
Accountants (AICPA). The auditor must be independent, as defined by the 
AICPA, of the CDC. Annually, the auditor must issue an opinion as to 
the fairness of the CDC's financial statements and their compliance 
with GAAP. For CDCs with a 504 portfolio balance of less than $20 
million (as calculated by SBA), the CDC's annual financial statements 
submitted to SBA must be reviewed by an independent CPA in accordance 
with GAAP.
    (d) Auditor qualifications. The audit or review must be conducted 
by an independent certified public accountant who:
    (1) Is registered or licensed to practice as a public accountant, 
and is in good standing, under the laws of the state or other political 
subdivision of the United States in which the CDC's principal office is 
located;
    (2) Agrees in the engagement letter with the CDC to provide the SBA 
with access to and copies of any work papers, policies, and procedures 
relating to the services performed;
    (3)(i) Is in compliance with the AICPA Code of Professional 
Conduct; and
    (ii) Meets the independence requirements and interpretations of the 
Securities and Exchange Commission and its staff;
    (4) Has received a peer review or is enrolled in a peer review 
program that meets AICPA guidelines; and
    (5) Is otherwise acceptable to SBA.

0
40. Amend Sec.  120.830 to revise paragraph (a) to read as follows:


Sec.  120.830  Reports a CDC must submit.

* * * * *
    (a) An annual report within one hundred-eighty days after the end 
of the CDC's fiscal year (to include audited or reviewed financial 
statements of the CDC, as applicable, and any affiliates or 
subsidiaries of the CDC prepared in accordance with Sec.  120.826(c) 
and (d)), and such interim reports as SBA may require.
    (1) The audited financial statements must, at a minimum, include 
the following:
    (i) Audited balance sheet;
    (ii) Audited statement of income (or receipts) and expense;
    (iii) Audited statement of source and application of funds;
    (iv) Such footnotes as are necessary to an understanding of the 
financial statements;
    (v) Auditor's letter to management on internal control weaknesses; 
and
    (vi) The auditor's report.
    (2) The reviewed financial statements must, at a minimum, include 
the following:
    (i) Balance sheet;
    (ii) Statement of income (or receipts) and expense;
    (iii) Statement of source and application of funds;
    (iv) Such footnotes as are necessary to an understanding of the 
financial statements; and
    (v) The accountant's review report.
* * * * *

0
41. Amend Sec.  120.839 to add three new sentences after the second 
sentence in the introductory text to read as follows:


Sec.  120.839  Case-by-case application to make a 504 loan outside of a 
CDC's Area of Operations.

    * * * In addition, the CDC must have satisfactory SBA performance, 
as determined by SBA in its discretion. The CDC's Risk Rating, among 
other factors, will be considered in determining satisfactory SBA 
performance. Other factors may include, but are not limited to, on-site 
review/examination assessments, historical

[[Page 75519]]

performance measures (like default rate, purchase rate and loss rate), 
loan volume to the extent that it impacts performance measures, and 
other performance related measurements and information (such as 
contribution toward SBA mission). * * *
* * * * *

0
42. Revise Sec.  120.841(c) to read as follows:


Sec.  120.841  Qualifications for the ALP.

* * * * *
    (c) CDC reviews. CDC reviews conducted by SBA must be current 
(within the last 24 months, if applicable) for applicants for ALP 
status. The CDC must have received a review assessment of either 
``Acceptable'' or ``Acceptable With Corrective Actions Required.'' In 
addition, the CDC must have satisfactory SBA performance, as determined 
by SBA in its discretion. The CDC's Risk Rating, among other factors, 
will be considered in determining satisfactory SBA performance. Other 
factors may include, but are not limited to, on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, and other performance related measurements and 
information (such as contribution toward SBA mission);
* * * * *

0
43. Revise Sec.  120.845(b) to read as follows:


Sec.  120.845  Premier Certified Lenders Program (PCLP).

* * * * *
    (b) Application. A CDC must apply for PCLP status to the Lead SBA 
Office. The Lead SBA Office will send its written recommendation and 
the application to SBA's PCLP Loan Processing Center. The PCLP Loan 
Processing Center will review these materials and forward them to the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority for final determination.
* * * * *

0
44. Remove the undesignated center heading before Sec.  120.853.

0
45. Revise the heading for Sec.  120.853 to read as set forth below and 
remove the first sentence of the section.


Sec.  120.853  Inspector General audits of CDCs.

* * * * *

0
46. Remove the undesignated center heading before Sec.  120.854.


Sec.  120.854  [Removed]

0
47. Remove Sec.  120.854.


Sec.  120.855  [Removed]

0
48. Remove Sec.  120.855.


Sec.  120.856  [Removed]

0
49. Remove Sec.  120.856.

0
50. Revise Sec.  120.956 to read as follows:


Sec.  120.956  Suspension or revocation of brokers and dealers.

    The appropriate Office of Capital Access official in accordance 
with Delegations of Authority may suspend or revoke the privilege of 
any broker or dealer to participate in the sale or marketing of 
Debentures and Certificates for actions or conduct bearing negatively 
on the broker's fitness to participate in the securities market. SBA 
must give the broker or dealer written notice, stating the reasons, at 
least 10 business days prior to the effective date of the suspension or 
revocation. A broker or dealer may appeal the suspension or revocation 
made under this section pursuant to the procedures set forth in part 
134 of this chapter. The action of this official will remain in effect 
pending resolution of the appeal.

0
51. Revise the heading to subpart I and add an undesignated center 
heading and Sec. Sec.  120.1000, 120.1005, 120.1010, 120.1015, 
120.1025, 120.1050, 120.1051, 120.1055, and 120.1060 to read as 
follows:
Subpart I--Risk-Based Lender Oversight

Supervision

Sec.
120.1000 Risk-Based Lender Oversight.
120.1005 Bureau of PCLP Oversight.
120.1010 SBA access to SBA Lender, Intermediary, and NTAP files.
120.1015 Risk Rating System.
120.1025 Off-site reviews and monitoring.
120.1050 On-site reviews and examinations.
120.1051 Frequency of on-site reviews and examinations.
120.1055 Review and examination results.
120.1060 Confidentiality of Reports, Risk Ratings, and related 
Confidential Information.
* * * * *

Subpart I--Risk-Based Lender Oversight

Supervision


Sec.  120.1000  Risk-Based Lender Oversight.

    (a) Risk-Based Lender Oversight. SBA supervises, examines, and 
regulates, and enforces laws against, SBA Supervised Lenders and the 
SBA operations of SBA Lenders, Intermediaries, and NTAPs.
    (b) Scope. Most rules and standards set forth in this subpart apply 
to SBA Lenders as well as Intermediaries and NTAPs, However, SBA has 
separate regulations for enforcement grounds and enforcement actions 
for Intermediaries and NTAPs at Sec.  120.1425 and Sec.  120.1540.


Sec.  120.1005  Bureau of PCLP Oversight.

    SBA's Bureau of PCLP Oversight within OCRM, monitors the 
capitalization of PCLP CDC pilot participants' LLRFs and performs other 
related functions.


Sec.  120.1010  SBA access to SBA Lender, Intermediary, and NTAP files.

    An SBA Lender, Intermediary, and NTAP must allow SBA's authorized 
representatives, including representatives authorized by the SBA 
Inspector General, during normal business hours, access to its files to 
review, inspect, and copy all records and documents, relating to SBA 
guaranteed loans or as requested for SBA oversight.


Sec.  120.1015  Risk Rating System.

    (a) Risk Rating. SBA may assign a Risk Rating to all SBA Lenders, 
Intermediaries, and NTAPs on a periodic basis. Risk Ratings are based 
on certain risk-related portfolio performance factors as set forth in 
notices or SBA's SOPs and as published from time to time.
    (b) Rating categories. Risk Ratings fall into one of two broad 
categories: Acceptable Risk Ratings or Less Than Acceptable Risk 
Ratings.


Sec.  120.1025  Off-site reviews and monitoring.

    SBA may conduct off-site reviews and monitoring of SBA Lenders, 
Intermediaries, and NTAPs, including SBA Lenders', Intermediaries' or 
NTAPs' self-assessments.


Sec.  120.1050  On-site reviews and examinations.

    (a) On-site reviews. SBA may conduct on-site reviews of the SBA 
loan operations of SBA Lenders. The on-site review may include, but is 
not limited to, an evaluation of the following:
    (1) Portfolio performance;
    (2) SBA operations management;
    (3) Credit administration; and
    (4) Compliance with Loan Program Requirements.
    (b) On-site examinations. SBA may conduct safety and soundness 
examinations of SBA Supervised Lenders, except SBA will not conduct 
safety and soundness examinations of Other Regulated SBLCs under Sec.  
Sec.  120.1510 and 1511. The on-site safety and soundness examination 
may

[[Page 75520]]

include, but is not limited to, an evaluation of:
    (1) Capital adequacy;
    (2) Asset quality (including credit administration and allowance 
for loan losses);
    (3) Management quality (including internal controls, loan portfolio 
management, and asset/liability management);
    (4) Earnings;
    (5) Liquidity; and
    (6) Compliance with Loan Program Requirements.
    (c) On-site reviews/examinations of Intermediaries and NTAPs. SBA 
may perform on-site reviews or examinations of Intermediaries and 
NTAPs.
    (d) Other on-site reviews or examinations. SBA may perform other 
on-site reviews/examinations as needed as determined by SBA in its 
discretion.


Sec.  120.1051  Frequency of on-site reviews and examinations.

    SBA may conduct on-site reviews and examinations of SBA Lenders, 
Intermediaries, and NTAPs on a periodic basis. SBA may consider, but is 
not limited to, the following factors in determining frequency:
    (a) Off-site review/monitoring results, including an SBA Lender's, 
Intermediary's or NTAP's Risk Rating;
    (b) SBA loan portfolio size;
    (c) Previous review or examination findings;
    (d) Responsiveness in correcting deficiencies noted in prior 
reviews or examinations; and
    (e) Such other risk-related information as SBA, in its discretion, 
determines to be appropriate.


Sec.  120.1055  Review and examination results.

    (a) Written Reports. SBA will provide an SBA Lender, Intermediary, 
and NTAP a copy of SBA's written report prepared as a result of the SBA 
Lender review or examination (``Report''). The Report may contain 
findings, conclusions, corrective actions and recommendations. Each 
director (or manager, in the absence of a Board of Directors) of the 
SBA Lender, Intermediary, and NTAP, in keeping with his or her 
responsibilities, must become fully informed regarding the contents of 
the Report.
    (b) Response to review and examination Reports. SBA Lenders, 
Intermediaries, and NTAPs must respond to Report findings and 
corrective actions, if any, in writing to SBA and, if requested, submit 
proposed corrective actions and/or a capital restoration plan. An SBA 
Lender, Intermediary, or NTAP must respond within 30 days from the 
Report date unless SBA notifies the SBA Lender, Intermediary, or NTAP 
in writing that the response, proposed corrective actions or capital 
restoration plan is to be filed within a different time period. The SBA 
Lender, Intermediary, or NTAP response must address each finding and 
corrective action. In proposing a corrective action or capital 
restoration plan, the SBA Lender, Intermediary, or NTAP must detail: 
The steps it will take to correct the finding(s); the time within which 
each step will be taken; the timeframe for accomplishing the entire 
corrective action plan; and the person(s) or department at the SBA 
Lender, Intermediary, or NTAP charged with carrying out the corrective 
action or capital restoration plan, as applicable.
    (c) SBA response. SBA will provide written notice of whether the 
response and, if applicable, any corrective action or capital 
restoration plan, is approved, or whether SBA will seek additional 
information or require other action.
    (d) Failure to respond or to submit or implement an acceptable 
plan. If an SBA Lender, Intermediary, or NTAP fails to respond in 
writing to SBA, respond timely to SBA, or provide a response acceptable 
to SBA within SBA's discretion, or respond to all findings and required 
corrective actions in a Report, then SBA may take enforcement action 
under Subpart I. If an SBA Lender, Intermediary, or NTAP that is 
requested to submit a corrective action plan or capital restoration 
plan to SBA fails to do so in writing; fails to submit timely such plan 
to SBA; or fails to submit a plan acceptable to SBA within SBA's 
discretion, then SBA may take enforcement action under Sec.  120.1500 
through Sec.  120.1540. If an SBA Lender, Intermediary, or NTAP fails 
to implement in any material respect a corrective action or capital 
restoration plan within the required timeframe, then SBA may undertake 
enforcement action under Sec.  120.1500 through Sec.  120.1540.


Sec.  120.1060.  Confidentiality of Reports, Risk Ratings and related 
Confidential Information.

    (a) In general. Reports and other SBA prepared review or 
examination related documents are the property of SBA and are loaned to 
an SBA Lender, Intermediary, or NTAP for its confidential use only. The 
Reports, Risk Ratings, and related Confidential Information are 
privileged and confidential as more fully explained in paragraph (b) of 
this section. The Report, Risk Rating, and Confidential Information 
must not be relied upon for any purpose other than SBA's Lender 
oversight and SBA's portfolio management purposes. An SBA Lender, 
Intermediary, or NTAP must not make any representations concerning the 
Report (including its findings, conclusions, and recommendations), the 
Risk Rating, or the Confidential Information. For purposes of this 
regulation, Report means the review or examination report and related 
documents. For purposes of this regulation, Confidential Information is 
defined in the SBA Lender information portal and by notice issued from 
time to time. Access to the Lender information portal may be obtained 
by contacting the OCRM.
    (b) Disclosure prohibition. Each SBA Lender, Intermediary, and NTAP 
is prohibited from disclosing its Report, Risk Rating, and Confidential 
Information, in full or in part, in any manner, without SBA's prior 
written permission. An SBA Lender, Intermediary, and NTAP may use the 
Report, Risk Rating, and Confidential Information for confidential use 
within its own immediate corporate organization. SBA Lenders, 
Intermediaries, and NTAPs must restrict access to their Report, Risk 
Rating and Confidential Information to those of its officers and 
employees who have a legitimate need to know such information for the 
purpose of assisting them in improving the SBA Lender's, 
Intermediary's, or NTAP's SBA program operations in conjunction with 
SBA's Lender Oversight Program and SBA's portfolio management (for 
purposes of this regulation, each referred to as a ``permitted 
party''), and to those for whom SBA has approved access by prior 
written consent, and to those for whom access is required by applicable 
law or legal process. If such law or process requires SBA Lender, 
Intermediary, or NTAP to disclose the Report, Risk Rating, or 
Confidential Information to any person other than a permitted party, 
SBA Lender, Intermediary, or NTAP will promptly notify SBA and SBA's 
Information Provider in writing so that SBA and the Information 
Provider have, within their discretion, the opportunity to seek 
appropriate relief such as an injunction or protective order prior to 
disclosure. For purposes of this regulation, ``Information Provider'' 
means any contractor that provides SBA with the Risk Rating. Each SBA 
Lender, Intermediary, and NTAP must ensure that each permitted party is 
aware of these regulatory requirements and must ensure that each such 
permitted party abides by them. Any disclosure of the

[[Page 75521]]

Report, Risk Rating, or Confidential Information other than as 
permitted by this regulation may result in appropriate action as 
authorized by law. An SBA Lender, Intermediary, and NTAP will indemnify 
and hold harmless SBA from and against any and all claims, demands, 
suits, actions, and liabilities to any degree based upon or resulting 
from any unauthorized use or disclosure of the Report, Risk Rating, or 
Confidential Information. Information Provider contact information is 
available from the Office of Capital Access.

0
52. In subpart I, add an undesignated center heading and Sec. Sec.  
120.1400, 120.1425, 120.1500, 120.1510, 120.1511, 120.1540, and 
120.1600 to read as follows:
* * * * *

Subpart I--Risk-Based Lender Oversight

* * * * *
Enforcement Actions
Sec.
120.1400 Grounds for enforcement actions--SBA Lenders.
120.1425 Grounds for enforcement actions--Intermediaries 
participating in the Microloan Program and NTAPs.
120.1500 Types of enforcement actions--SBA Lenders.
120.1510 Other Regulated SBLCs.
120.1511 Certification and other reporting and notification 
requirements for Other Regulated SBLCs.
120.1540 Types of enforcement actions--Intermediaries participating 
in the Microloan Program and NTAPs.
120.1600 General procedures for enforcement actions against SBA 
Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management 
Officials, Other Persons, Intermediaries, and NTAPs.

Enforcement Actions


Sec.  120.1400  Grounds for enforcement actions--SBA Lenders.

    (a) Agreement. By making SBA 7(a) guaranteed loans or 504 loans, 
SBA Lenders automatically agree to the terms, conditions, and remedies 
in Loan Program Requirements, as promulgated or issued from time to 
time and as if fully set forth in the SBA Form 750, Loan Guaranty 
Agreement or other applicable participation, guaranty, or supplemental 
agreement.
    (b) Scope. SBA may undertake one or more of the enforcement actions 
listed in Sec.  120.1500 or as otherwise authorized by law, if SBA 
determines that the grounds applicable to the enforcement action exist. 
Paragraphs (c) through (e) of this section list the grounds that 
trigger enforcement actions against each type of SBA Lender. In 
general, the grounds listed in paragraph (c) apply to all SBA Lenders. 
However, certain enforcement actions against SBA Supervised Lenders 
require the existence of certain grounds, as set forth in paragraphs 
(d) and (e). In addition, paragraph (f) of this section lists two 
additional grounds for taking enforcement action against CDCs that do 
not apply to other SBA Lenders.
    (c) Grounds in general. Except as provided in paragraphs (d) and 
(e) of this section, the grounds that may trigger an enforcement action 
against any SBA Lender (regardless of its Risk Rating) include:
    (1) Failure to maintain eligibility requirements for specific SBA 
programs and delegated authorities, including but not limited to: 7(a), 
PLP, SBAExpress, 504, ALP, PCLP, the alternative loss reserve pilot 
program and any pilot loan program;
    (2) Failure to comply materially with any requirement imposed by 
Loan Program Requirements;
    (3) Making a material false statement or failure to disclose a 
material fact to SBA. (A material fact is any fact which is necessary 
to make a statement not misleading in light of the circumstances under 
which the statement was made.);
    (4) Not performing underwriting, closing, disbursing, servicing, 
liquidation, litigation or other actions in a commercially reasonable 
and prudent manner for 7(a) or 504 loans, respectively, as applicable. 
Evidence of such performance or actions may include, but is not limited 
to, the SBA Lender having a repeated Less Than Acceptable Risk Rating 
(generally in conjunction with other evidence) or an on-site review/
examination assessment which is Less Than Acceptable;
    (5) Failure within the time period specified to correct an 
underwriting, closing, disbursing, servicing, liquidation, litigation, 
or reporting deficiency, or failure in any material respect to take 
other corrective action, after receiving notice from SBA of a 
deficiency and the need to take corrective action;
    (6) Engaging in a pattern of uncooperative behavior or taking an 
action that SBA determines is detrimental to an SBA program, that 
undermines management or administration of a program, or that is not 
consistent with standards of good conduct. Prior to issuing a notice of 
a proposed enforcement action or immediate suspension under Sec.  
120.1500 based upon this paragraph, SBA must send prior written notice 
to the SBA Lender explaining why the SBA Lender's actions were 
uncooperative, detrimental to the program, undermined SBA's management 
of the program, or were not consistent with standards of good conduct. 
The prior notice must also state that the SBA Lender's actions could 
give rise to a specified enforcement action, and provide the SBA Lender 
with a reasonable time to cure the deficiency before any further action 
is taken;
    (7) Repeated failure to correct continuing deficiencies;
    (8) Unauthorized disclosure of Reports, Risk Rating, or 
Confidential Information;
    (9) Any other reason that SBA determines may increase SBA's 
financial risk (for example, repeated Less Than Acceptable Risk Ratings 
(generally in conjunction with other indicators of increased financial 
risk) or indictment on felony or fraud charges of an officer, key 
employee, or loan agent involved with SBA loans for the SBA Lender);
    (10) As otherwise authorized by law; and
    (11) For immediate suspension of all SBA Lenders from delegated 
authorities--upon a determination by SBA that one or more of the 
grounds in paragraph (c) or paragraph (f) of this section, as 
applicable, exist and that immediate action is needed to prevent 
significant impairment of the integrity of the 7(a) or 504 loan 
program.
    (12) For immediate suspension of all SBA Lenders except SBA 
Supervised Lenders from the authority to participate in the SBA loan 
program, including the authority to make, service, liquidate, or 
litigate 7(a) or 504 loans--upon a determination by SBA that one or 
more of the grounds in paragraph (c) or paragraph (f) of this section, 
as applicable, exist and that immediate action is needed to prevent 
significant impairment of the integrity of the 7(a) or 504 loan 
program.
    (d) Grounds required for certain enforcement actions against SBA 
Supervised Lenders (except Other Regulated SBLCs) or, as applicable, 
Other Persons. For purposes of Subpart I, Other Person means a 
Management Official, attorney, accountant, appraiser, Lender Service 
Provider or other individual involved in the SBA Supervised Lender's 
operations. For the below listed SBA Supervised Lender enforcement 
actions, the grounds that are required to take the enforcement action 
are:
    (1) For SBA program suspensions and revocations--
    (i) False statements knowingly made in any required written 
submission to SBA; or

[[Page 75522]]

    (ii) An omission of a material fact from any written submission 
required by SBA; or
    (iii) A willful or repeated violation of the Small Business Act 
(the Act) or SBA regulations; or
    (iv) A willful or repeated violation of any condition imposed by 
SBA with respect to any application, request, or agreement with SBA; or
    (v) A violation of any cease and desist order of SBA.
    (2) For SBA program immediate suspension--SBA may suspend an SBA 
Supervised Lender, effective immediately, if in addition to meeting the 
grounds set forth in paragraph (d)(1) of this section, the 
Administrator (or the Deputy Administrator, only if the Administrator 
is unavailable to take such action) finds extraordinary circumstances 
and takes such action in order to protect the financial or legal 
position of the United States.
    (3) For cease and desist orders--
    (i) A violation of the Act or SBA regulations, or
    (ii) Where an SBA Supervised Lender or Other Person engages in or 
is about to engage in any acts or practices that will violate the Act 
or SBA's regulations.
    (4) For an emergency cease and desist order--
    (i) Where grounds for cease and desist order are met,
    (ii) The Administrator (or the Deputy Administrator, only if the 
Administrator is unavailable to take such action) finds extraordinary 
circumstances, and
    (iii) In order to protect the financial or legal position of the 
United States.
    (5) For transfer of Loan portfolio--
    (i) Where a court has appointed a receiver; or
    (ii) The SBA Supervised Lender is either not in compliance with 
capital requirements or is insolvent. An SBA Supervised Lender is 
insolvent within the meaning of this provision when all of its capital, 
surplus, and undivided profits are absorbed in funding losses and the 
remaining assets are not sufficient to pay and discharge its contracts, 
debts, and other obligations as they come due.
    (6) For transfer of servicing activity--
    (i) Where grounds for transfer of Loan portfolio are met; or
    (ii) Where the SBA Supervised Lender is otherwise operating in an 
unsafe and unsound condition.
    (7) For order to remove Management Official--where, in the opinion 
of the Administrator or his/her delegatee, the Management Official--
    (i) Willfully and knowingly committed a substantial violation of 
the Act, SBA regulation, a final cease and desist order, or any 
agreement by the Management Official or the SBA Supervised Lender under 
the Act or SBA regulations, or
    (ii) Willfully and knowingly committed a substantial breach of a 
fiduciary duty of that person as a Management Official and the 
violation or breach of fiduciary duty is one involving personal 
dishonesty on the part of such Management Official, or
    (iii) The Management Official is convicted of a felony involving 
dishonesty or breach of trust and the conviction is no longer subject 
to further judicial review (excludes writ of habeas corpus).
    (8) For order to suspend or prohibit participation of Management 
Official (interim measure pending removal)--where SBA is undertaking 
enforcement action of removal of a Management Official.
    (9) For order to suspend or prohibit participation of Management 
Official due to criminal charges--where the Management Official is 
charged in any information, indictment or complaint authorized by a 
United States attorney with a felony involving dishonesty or breach of 
trust.
    (e) Grounds required for certain enforcement actions against SBLCs 
and Other Regulated SBLCs.
    (1) Capital directive. If the AA/CA determines that an SBLC is 
capitally impaired or is otherwise being operated in an imprudent 
manner, the AA/CA may, in addition to any other action authorized by 
law, issue a directive to the SBLC to increase capital consistent with 
Sec.  120.1500(d)(1).
    (2) Civil action for termination. If an SBLC violates the Act or 
SBA regulations, SBA may institute a civil action to terminate SBLC 
rights, privileges, and the franchise under Sec.  120.1500(d)(2).
    (f) Additional grounds specific to CDCs. In addition to the grounds 
set forth in paragraphs (b) and (c) of this section, SBA may take 
enforcement action against a CDC for:
    (1) Failure to receive SBA approval for at least four 504 loans 
during the last two consecutive fiscal years, or
    (2) For PCLP CDCs, failure to establish or maintain a LLRF as 
required by the PCLP.


Sec.  120.1425  Grounds for enforcement actions--Intermediaries 
participating in the Microloan Program and NTAPs.

    (a) Agreement. By participating in the SBA Microloan or NTAP 
program, Intermediaries and NTAPs automatically agree to the terms, 
conditions, and remedies in this Part 120 as if fully set forth in 
their participation agreement and all other agreements jointly executed 
by the Intermediary or NTAP and SBA.
    (b) Scope. SBA may undertake one or more of the enforcement actions 
listed in Sec.  120.1540, or as otherwise authorized by law, if SBA 
determines that any of the grounds listed in paragraphs (c) through (e) 
of this section exist.
    (c) Grounds in general--For any Intermediary or NTAP, grounds that 
may trigger enforcement action against the Intermediary or NTAP 
(regardless of its Risk Rating) include:
    (1) Violation of any laws, regulations, or policies of the program; 
or
    (2) Failure to meet any one of the following performance standards:
    (i) Coverage of the service territory assigned by SBA, including 
honoring SBA's determined boundaries of neighboring intermediaries and 
NTAPs;
    (ii) Fulfill reporting requirements;
    (iii) Manage program funds and matching funds in a satisfactory and 
financially sound manner;
    (iv) Communicate and file reports within six months after beginning 
participation in program;
    (v) Maintain a currency rate of 85% or more for the Intermediary's 
SBA Microloan portfolio (that is, loans that are no more than 30 days 
late in scheduled payments);
    (vi) Maintain a default rate in the Intermediary's Microloan 
portfolio of 15% or less of the cumulative dollars loaned under the 
program;
    (vii) Maintain a staff trained in Microloan program issues and 
requirements; or
    (viii) Any other reason that SBA determines may increase SBA's 
financial or program risk (for example, repeated Less Than Acceptable 
Risk Ratings (generally in conjunction with other indicators of 
increased risk) or indictment on felony or fraud charges of an officer, 
key employee, or loan agent involved with SBA programs for the 
Intermediary or NTAP).
    (d) Additional grounds specific to Intermediaries. In addition to 
the grounds set forth in paragraph (c) of this section, SBA may take 
enforcement action against an Intermediary for:
    (1) Failure to satisfactorily provide in-house technical assistance 
to Microloan clients and prospective Microloan clients; or
    (2) Failure to close and fund a minimum of four Microloans 
annually.
    (e) Additional grounds specific to NTAPs. In addition to grounds 
set forth in paragraph (c) of this section, SBA may take enforcement 
action against an NTAP for failure to show that, for every 30 clients 
for which the NTAP provided

[[Page 75523]]

technical assistance, at least one client received a loan from the 
private sector.


Sec.  120.1500  Types of enforcement actions--SBA Lenders.

    Upon a determination that the grounds set forth in Sec.  120.1400 
exist, SBA may undertake, in SBA's discretion, one or more of the 
following enforcement actions for each of the types of SBA Lenders 
listed. SBA will take such action in accordance with procedures set 
forth in Sec.  120.1600. If enforcement action is taken under this 
section and the SBA Lender fails to implement required corrective 
action in any material respect within the required timeframe in 
response to the enforcement action, SBA may take further enforcement 
action, as authorized by law. SBA's decision to take an enforcement 
action will not, by itself, invalidate a guaranty previously provided 
by SBA.
    (a) Enforcement actions for all SBA Lenders. (1) Imposition of 
portfolio guaranty dollar limit. SBA may limit the maximum dollar 
amount that SBA will guarantee on the SBA Lender's SBA loans or 
debentures.
    (2) Suspension or revocation of delegated authority. SBA may 
suspend or revoke an SBA Lender's delegated authority (including, but 
not limited to, PLP, SBA Express, or PCLP delegated authorities).
    (3) Suspension or revocation from SBA program. SBA may suspend or 
revoke an SBA Lender's authority to participate in the SBA loan 
program, including the authority to make, service, liquidate, or 
litigate 7(a) or 504 loans. Section 120.1400(d)(1) sets forth the 
grounds for SBA program suspension or revocation of an SBA Supervised 
Lender (except Other Regulated SBLCs). The grounds for SBA program 
suspension or revocation for all other SBA Lenders are set forth in 
Sec.  120.1400(c) and, as applicable, paragraph (f) of Sec.  120.1400.
    (4) Immediate suspension. SBA may suspend, effective immediately, 
an SBA Lender's delegated authority or authority to participate in the 
SBA loan program, or the authority to make, service, liquidate, or 
litigate 7(a) or 504 loans. Section 120.1400(d)(2) sets forth the 
grounds for SBA program immediate suspension of an SBA Supervised 
Lender (except Other Regulated SBLCs). The grounds for SBA program 
immediate suspension for all other SBA Lenders and the grounds for 
immediate suspension of delegated authority for all SBA Lenders are set 
forth in Sec.  120.1400(c)(11) and Sec.  120.1400(c)(12).
    (5) Debarment. In accordance with 2 CFR Parts 180 and 2700, SBA may 
take any necessary action to debar a Person, as defined in Sec.  
120.10, including but not limited to an officer, a director, a general 
partner, a manager, an employee, an agent or other participant in the 
affairs of an SBA Lender's SBA operations.
    (6) Other actions available under law. SBA may take all other 
enforcement actions against SBA Lenders available under law.
    (b) Enforcement actions specific to 7(a) Lenders. In addition to 
those enforcement actions applicable to all SBA Lenders, SBA may 
suspend or revoke a 7(a) Lender's authority to sell or purchase loans 
or certificates in the Secondary Market.
    (c) Enforcement actions specific to SBA Supervised Lenders and 
Other Persons (except Other Regulated SBLCs). In addition to those 
enforcement actions listed in paragraphs (a) and (b) of this section, 
SBA may take any one or more of the following enforcement actions 
specific to SBA Supervised Lenders and as applicable, Other Persons:
    (1) Cease and desist order. SBA may issue a cease and desist order 
against the SBA Supervised Lender or Other Person. The Cease and Desist 
order may either require the SBA Supervised Lender or the Other Person 
to take a specific action, or to refrain from a specific action. The 
Cease and Desist Order may be issued as effective immediately (or as a 
proposal for Order). SBA may include in the cease and desist order the 
suspension of authority to lend.
    (2) Remove Management Official. SBA may issue an order to remove a 
Management Official from office. SBA may suspend a Management Official 
from office or prohibit a Management Official from participating in 
management of the SBA Supervised Lender or in reviewing, approving, 
closing, servicing, liquidating or litigating any 7(a) loan, or any 
other activities of the SBA Supervised Lender while the removal 
proceeding is pending in order to protect an SBA Supervised Lender or 
the interests of SBA or the United States.
    (3) Initiate request for appointment of receiver. The SBA may make 
application to a district court to take exclusive jurisdiction of an 
SBA Supervised Lender and appoint a trustee or receiver to hold or 
administer or liquidate the SBA Supervised Lender's assets under 
direction of the court. The receiver may take possession of the 
portfolio of 7(a) loans and sell such loans to a third party, and/or 
take possession of servicing activities of 7(a) loans and sell such 
servicing rights to a third party.
    (4) Civil monetary penalties for report filing failure. SBA may 
seek civil penalties, in accordance with Sec.  120.465, of not more 
than $5,000 a day against an SBA Supervised Lender that fails to file 
any regular or special report by its due date as specified by 
regulation or SBA written directive.
    (d) Enforcement actions specific to SBLCs. In addition to those 
supervisory actions listed in paragraphs (a), (b), and (c) of this 
section, SBA may take the following enforcement actions specific to 
SBLCs.
    (1) Capital directive. The AA/CA may issue a capital directive upon 
a determination that the grounds in Sec.  120.1400(e)(1) exist. A 
directive may order the SBLC to:
    (i) Achieve its minimum capital requirement applicable to it by a 
specified date;
    (ii) Adhere to a previously submitted capital restoration plan 
(provided under Sec.  120.462 or Sec.  120.1055) to achieve the 
applicable capital requirement;
    (iii) Submit and adhere to a capital restoration plan acceptable to 
SBA describing the means and time schedule by which the SBLC will 
achieve the applicable capital requirement (The SBLC must provide its 
capital restoration plan within 30 days from the date of the SBA order 
unless SBA notifies the SBLC that the plan is to be filed within a 
different time period. SBA may perform an on-site examination 
(generally within 90 days after the restoration plan is submitted) to 
verify the implementation of the plan and verify that the SBLC meets 
minimum capital requirements.);
    (iv) Refrain from taking certain actions without obtaining SBA's 
prior written approval (Such actions may include but are not limited 
to: paying any dividend; retiring any equity; maintaining a rate of 
growth that causes further deterioration in the capital percentage; 
securitizing any unguaranteed portion of its 7(a) loans; or selling 
participations in any of its 7(a) loans); or
    (v) Undertake a combination of any of these or similar actions.
    (2) Civil action for termination. SBA may institute a civil action 
to terminate the rights, privileges, and franchises of an SBLC.
    (e) Enforcement actions specific to CDCs. In addition to those 
enforcement actions listed in paragraph (a) of this section, SBA may 
take any one or more of the following enforcement actions specific to 
CDCs:
    (1) Require the CDC to transfer part or all of its existing 504 
loan portfolio and/or part or all of its pending 504 loan applications 
to SBA, another CDC, or

[[Page 75524]]

any other entity designated by SBA. Any such transfer may be on a 
temporary or permanent basis, in SBA's discretion; or
    (2) Instruct the Central Servicing Agent to withhold payment of 
servicing, late and/or other fee(s) to the CDC.


Sec.  120.1510  Other Regulated SBLCs.

    Other Regulated SBLCs are exempt from Sec. Sec.  120.465, 
120.1050(b), 120.1400(d), 120.1500(c), and 120.1600(b). This exemption 
is not intended to preclude SBA from seeking any other remedy 
authorized by law or equity.


Sec.  120.1511  Certification and other reporting and notification 
requirements for Other Regulated SBLCs.

    (a) Certification. An SBLC seeking Other Regulated SBLC status must 
certify to SBA in writing that its lending activities are subject to 
regulation by a Federal Financial Institution Regulator or state 
banking regulator. This certification must be executed by the chair of 
the board of directors of the SBLC and submitted to SBA either:
    (1) Within 60 calendar days of the effective date of this section 
or
    (2) If the SBLC becomes subject to regulation by a Federal 
Financial Institution Regulator or state banking regulator after the 
effective date of this section for any reason (e.g. license transfers), 
within 60 days of the date that the SBLC becomes directly examined and 
directly regulated by such regulator.
    (b) Contents of Certification: This certification must include:
    (1) The identity of the Federal Financial Institution Regulator or 
state banking regulator that regulates the lending activities of the 
SBLC;
    (2) A statement that the Federal Financial Institution Regulator or 
state banking regulator identified in paragraph (b)(1) of this section 
regularly conducts safety and soundness examinations on the SBLC itself 
and not only on the SBLC's parent company or affiliate, if any; and
    (3) The date of the most recent safety and soundness examination 
conducted on the SBLC by the Federal Financial Institution Regulator or 
state banking regulator. To qualify as an Other Regulated SBLC, the 
SBLC must have received this examination within the past 3 years of the 
date of certification.
    (c) Notification of examination. An Other Regulated SBLC must 
notify SBA in writing each time a Federal Financial Institution 
Regulator or state banking regulator conducts a safety and soundness 
examination, and this notification must be submitted to SBA within 30 
calendar days of the SBLC receiving the results of the examination. To 
retain its status as an Other Regulated SBLC, the Other Regulated SBLC 
must receive such examination, and provide the written notification to 
SBA, at least once every two years following initial certification.
    (d) Report. An Other Regulated SBLC must report in writing to SBA 
on its interactions with other Federal Financial Institution Regulators 
or state banking regulator (e.g., the results of the safety and 
soundness examinations and any order issued against the Other Regulated 
SBLC), to the extent allowed by law.
    (e) Notification of change in status. If, for any reason, an Other 
Regulated SBLC becomes no longer subject to regulation by a Federal 
Financial Institution Regulator or state banking regulator, the Other 
Regulated SBLC must immediately notify SBA in writing, and the 
exemption provided in Sec.  120.1510 will immediately no longer apply.
    (f) Extension of timeframes. SBA may in its discretion extend any 
timeframe imposed on the SBLC under this section if the SBLC can show 
good cause for any delay in meeting the time requirement. The SBLC may 
appeal this decision to the AA/CA.
    (g) Failure to satisfy requirements. In the event that an SBLC 
fails to satisfy the requirements set forth in paragraphs (a), (b), and 
(c) of this section, then the exemption provided in Sec.  120.1510 will 
not apply to the SBLC.


Sec.  120.1540  Types of enforcement actions--Intermediaries 
participating in the Microloan Program and NTAPs.

    Upon a determination that any ground set out in Sec.  120.1425 
exists, the SBA may take in its discretion, one or more of the 
following enforcement actions against an Intermediary or NTAP:
    (a) Suspension or pre-revocation sanctions which may include, but 
are not limited to:
    (1) Accelerated reporting requirements;
    (2) Accelerated loan repayment requirements for outstanding program 
debt to SBA, as applicable;
    (3) Imposition of a temporary lending moratorium, as applicable; or
    (4) Imposition of a temporary training moratorium.
    (b) Revocation of authority to participate in the Microloan program 
which will include:
    (1) Removal from the program;
    (2) Liquidation of Intermediary's Microloan Revolving Fund and Loan 
Loss Reserve Fund accounts by SBA, and application of the liquidated 
funds to any outstanding balance owed to SBA;
    (3) Payment of outstanding debt to SBA by the Intermediary;
    (4) Forfeiture or repayment of any unused grant funds by the 
Intermediary or NTAP;
    (5) Debarment of the organization from receipt of federal funds 
until loan and grant repayments are met; or
    (6) Taking such other actions available under law.


Sec.  120.1600  General procedures for enforcement actions against SBA 
Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management 
Officials, Other Persons, Intermediaries, and NTAPs.

    (a) In general. Except as otherwise set forth for the enforcement 
actions listed in paragraphs (b) and (c) of this section, SBA will 
follow the procedures listed below.
    (1) SBA's notice of enforcement action. (i) When undertaking an 
immediate suspension under Sec.  120.1500(a)(4), or prior to 
undertaking an enforcement action set forth in Sec.  120.1500(a), (b), 
and (e) and Sec.  120.1540, SBA will issue a written notice to the 
affected SBA Lender, Intermediary, or NTAP identifying the proposed 
enforcement action or notifying it of an immediate suspension. The 
notice will set forth in reasonable detail the underlying facts and 
reasons for the proposed action or immediate suspension. If the notice 
is for a proposed or immediate suspension, SBA will also state the 
scope and term of the proposed or immediate suspension.
    (ii) If a proposed enforcement action or immediate suspension is 
based upon information obtained from a third party other than the SBA 
Lender, Intermediary, NTAP or SBA, SBA's notice of proposed action or 
immediate suspension will provide copies of documentation received from 
such third party, or the name of the third party in case of oral 
information, unless SBA determines that there are compelling reasons 
not to provide such information. If compelling reasons exist, SBA will 
provide a summary of the information it received to the SBA Lender, 
Intermediary, or NTAP.
    (2) SBA Lender, Intermediary, or NTAP's opportunity to object. (i) 
An SBA Lender, Intermediary, or NTAP that desires to contest a proposed 
enforcement action or an immediate suspension must file, within 30 
calendar days of its receipt of the notice or within some other term 
established by SBA in its notice, a written objection with the 
appropriate Office of Capital Access official in accordance with

[[Page 75525]]

Delegations of Authority or other SBA official identified in the 
notice. Notice will be presumed to have been received within five days 
of the date of the notice unless the SBA Lender, Intermediary, or NTAP 
can provide compelling evidence to the contrary.
    (ii) The objection must set forth in detail all grounds known to 
the SBA Lender, Intermediary, or NTAP to contest the proposed action or 
immediate suspension and all mitigating factors, and must include 
documentation that the SBA Lender, Intermediary, or NTAP believes is 
most supportive of its objection. An SBA Lender, Intermediary, or NTAP 
must exhaust this administrative remedy in order to preserve its 
objection to a proposed enforcement action or an immediate suspension.
    (iii) If an SBA Lender, Intermediary, or NTAP can show legitimate 
reasons as determined by SBA in SBA's discretion why it does not 
understand the reasons given by SBA in its notice of the action, the 
Agency will provide clarification. SBA will provide the requested 
clarification in writing to the SBA Lender, Intermediary, or NTAP or 
notify the SBA Lender, Intermediary, or NTAP in writing that SBA has 
determined that such clarification is not necessary. SBA, in its 
discretion, will further advise in writing whether the SBA Lender, 
Intermediary, or NTAP may have additional time to present its objection 
to the notice. Requests for clarification must be made to the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority in writing and received by SBA within the 30 
day timeframe or the timeframe given by the notice for response.
    (iv) An SBA Lender, Intermediary, or NTAP may request additional 
time to respond to SBA's notice if it can show that there are 
compelling reasons why it is not able to respond within the 30 day 
timeframe or the response timeframe given by the notice. If such 
requests are submitted to the Agency, SBA may, in its discretion, 
provide the SBA Lender, Intermediary, or NTAP with additional time to 
respond to the notice of proposed action or immediate suspension. 
Requests for additional time to respond must be made in writing to the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority or other official identified in the notice and 
received by SBA within the 30 day timeframe or the response timeframe 
given by the notice.
    (v) Prior to the issuance of a final decision by SBA, if an SBA 
Lender, Intermediary, or NTAP can show that there is newly discovered 
material evidence which, despite the SBA Lender, Intermediary, or 
NTAP's exercise of due diligence, could not have been discovered within 
the timeframe given by SBA to respond to a notice, or that there are 
compelling reasons beyond the SBA Lender, Intermediary, or NTAP's 
control as to why it was not able to present a material fact or 
argument to SBA, and that the SBA Lender, Intermediary, or NTAP has 
been prejudiced by not being able to present such information, the SBA 
Lender, Intermediary, or NTAP may submit such information to SBA and 
request that the Agency consider such information in its final 
decision.
    (3) SBA's notice of final agency decision where SBA Lender, 
Intermediary, or NTAP filed objection to the proposed action or 
immediate suspension. (i) If the affected SBA Lender, Intermediary, or 
NTAP files a timely written objection to a proposed enforcement action 
other than an immediate suspension in accordance with this section, SBA 
must issue a written notice of final decision to the affected SBA 
Lender, Intermediary, or NTAP advising whether SBA is undertaking the 
proposed enforcement action and setting forth the grounds for the 
decision. SBA will issue such a notice of decision within 90 days of 
either receiving the objection or from when additional information is 
provided under paragraph (a)(2)(v) or (a)(3)(iii) of this section, 
whichever is later, unless SBA provides notice that it requires 
additional time.
    (ii) If the affected SBA Lender, Intermediary, or NTAP files a 
timely written objection to a notice of immediate suspension, SBA must 
issue a written notice of final decision to the affected SBA Lender, 
Intermediary, or NTAP within 30 days of receiving the objection 
advising whether SBA is continuing with the immediate suspension, 
unless SBA provides notice that it requires additional time. If the SBA 
Lender, Intermediary, or NTAP submits additional information to SBA 
(under paragraph (a)(2)(v) or (a)(3)(iii) of this section) after 
submitting its objection but before SBA issues its final decision, SBA 
must issue its final decision within 30 days of receiving such 
information, unless SBA provides notice that it requires additional 
time.
    (iii) Prior to issuing a notice of decision, SBA in its discretion 
can request additional information from the affected SBA Lender, 
Intermediary, NTAP or other parties and conduct any other investigation 
it deems appropriate. If SBA determines, in its discretion, to consider 
an untimely objection, it must issue a notice of final decision 
pursuant to this paragraph (a)(3).
    (4) SBA's notice of final agency decision where no filed objection 
or untimely objection not considered. If SBA chooses not to consider an 
untimely objection or if the affected SBA Lender, Intermediary, or NTAP 
fails to file a written objection to a proposed enforcement action or 
an immediate suspension, and if SBA continues to believe that such 
proposed enforcement action or immediate suspension is appropriate, SBA 
must issue a written notice of final decision to the affected SBA 
Lender, Intermediary, or NTAP that SBA is undertaking one or more of 
the proposed enforcement actions against the SBA Lender, Intermediary, 
or NTAP or that an immediate suspension of the SBA Lender, 
Intermediary, or NTAP will continue. Such a notice of final decision 
need not state any grounds for the action other than to reference the 
SBA Lender, Intermediary, or NTAP's failure to file a timely objection, 
and represents the final agency decision.
    (5) Appeals. An SBA Lender, Intermediary, or NTAP may appeal the 
final agency decision only in the appropriate federal district court.
    (b) Procedures for certain enforcement actions against SBA 
Supervised Lenders (except Other Regulated SBLCs) and, where 
applicable, Management Officials and Other Persons. (1) Suspension and 
revocation actions and cease and desist orders. If SBA seeks to suspend 
or revoke loan program authority (including, the authority to make, 
service, liquidate, or litigate SBA loans), or issue a cease and desist 
order to an SBA Supervised Lender or, as applicable, Other Person, SBA 
will follow the procedures below in lieu of those in paragraph (a) of 
this section.
    (i) Show cause order and hearing. The Administrator will serve upon 
the SBA Supervised Lender or Other Person an order to show cause why an 
order suspending or revoking the authority or why a cease and desist 
order should not be issued. The show cause order will contain a 
statement of the matters of fact and law asserted by SBA, as well as 
the legal authority and jurisdiction under which an administrative 
hearing will be held, and will set forth the place and time of the 
administrative hearing. The hearing will be conducted by an 
administrative law judge in accordance with 5 U.S.C. 554-557, 15 U.S.C. 
650, and applicable sections of part 134 of this chapter. The 
Administrative Law Judge will issue a recommended decision based on the 
record.
    (ii) Witnesses. The party calling witnesses will pay the witness 
the same fees and mileage paid witnesses for their appearance in U.S. 
courts.

[[Page 75526]]

    (iii) Administrator finding and order issuance. If after the 
administrative hearing, or the SBA Supervised Lender's or Other 
Person's waiver of the administrative hearing, the Administrator 
determines that the order should be issued, the Administrator will 
issue an order to suspend or revoke authority or a cease and desist 
order, as applicable. The order will include a statement of findings, 
the grounds and reasons, and will specify the order's effective date. 
SBA will serve the order on the SBA Supervised Lender or Other Person. 
The Administrator may delegate the power to issue a cease and desist 
order or to suspend or revoke loan program authority only if the 
Administrator is unavailable and only to the Deputy Administrator.
    (iv) Judicial review. The order constitutes a final agency action. 
The SBA Supervised Lender or Other Person will have 20 days from the 
order issuance date to file an appeal in the appropriate federal 
district court.
    (2) Immediate suspension or immediate cease and desist order. If 
SBA undertakes an immediate suspension of authority to participate in 
the 7(a) loan program or immediate cease and desist order against an 
SBA Supervised Lender or, as applicable, Other Person, SBA will within 
two business days follow the procedures set forth in paragraph (b)(1) 
of this section.
    (3) Removal of Management Official. If SBA undertakes the removal 
of a Management Official of an SBA Supervised Lender, SBA will follow 
the procedures below in lieu of those in paragraph (a) of this section.
    (i) Notice and hearing. SBA will serve upon the Management Official 
and the SBA Supervised Lender written notice of intention to remove 
that includes a statement of the facts constituting the grounds and the 
date, time, and place for an administrative hearing. The administrative 
hearing will be held between 30 and 60 days from the date notice is 
served, unless an earlier or later date is set at the request of the 
Management Official for good cause shown or at the request of the 
Attorney General. The hearing will be conducted in accordance with 5 
U.S.C. 554-557, 15 U.S.C. 650 and applicable sections of part 134 of 
this chapter. Failure of the Management Official to appear at the 
administrative hearing will constitute consent to the removal order. 
SBA will serve on the SBA Supervised Lender a copy of each notice that 
is served on a Management Official.
    (ii) Suspension from office or prohibition in participation, 
pending removal. The suspension or prohibition will take effect upon 
service of intention to remove the Management Official or such 
subsequent time as the Administrator or his/her delegate deems 
appropriate and serves notice. It will remain in effect pending the 
completion of the administrative proceedings to remove and until such 
time as either SBA dismisses the charges in the removal notice or, if 
an order to remove or prohibit participation is issued, until the 
effective date of an order to remove or prohibit. In the case of 
suspension or prohibition following criminal charges, it may remain in 
effect until the information, indictment, or complaint is finally 
disposed of, or until the suspension is terminated by SBA or by order 
of a district court. A Management Official may appeal to the 
appropriate federal district court for a stay of the suspension or 
prohibition pending completion of the administrative hearing not later 
than 10 days from the suspension or prohibition's effective date.
    (iii) Decision. SBA may issue the order of removal if the 
Management Official consents or is convicted of the criminal charges 
and the judgment is not subject to further judicial review (not 
including writ of habeas corpus), or if upon a record of a hearing, SBA 
finds that any of the notice grounds have been established. After the 
hearing, in the latter case, and within 30 days after SBA has notified 
the parties that the case has been submitted for final decision, SBA 
will render a decision (which includes findings of fact upon which the 
decision is predicated) and issue and serve an order upon each party to 
the proceeding. The decision will constitute final agency action.
    (iv) Effective date and judicial review. The removal order will 
take effect 30 days after date of service upon the SBA Supervised 
Lender and the Management Official except in case of consent which will 
be effective at the time specified in the order or in case of removal 
for conviction on criminal charges the order will be effective upon 
removal order service on the SBA Supervised Lender and the Management 
Official. The order will remain effective and enforceable, except to 
the extent it is stayed, modified, terminated, or set aside by 
Administrator or a reviewing court. The adversely affected party will 
have 20 days from the order issuance date to seek judicial review in 
the appropriate federal district court.
    (4) Receiverships, transfer of assets and servicing activities. If 
SBA undertakes the appointment of a receiver for, or the transfer of 
assets or servicing rights of, an SBA Supervised Lender, SBA will 
follow the applicable procedures in 15 U.S.C. 650.
    (5) Civil penalties for report filing failure. If SBA seeks to 
impose civil penalties against an SBA Supervised Lender for failure to 
file a report in accordance with SBA regulations or written directive, 
SBA will follow the procedures set forth for enforcement actions in 
Sec.  120.465.
    (c) Additional procedures for certain enforcement actions against 
SBLCs. Capital directive. (1) Notice of intent to issue capital 
directive. SBA will notify an SBLC in writing of its intention to issue 
a directive. The notice will state:
    (i) Reasons for issuance of the directive and
    (ii) The proposed contents of the directive.
    (2) Response to notice. (i) An SBLC may respond to the notice by 
stating why a capital directive should not be issued and/or by 
proposing alternative contents for the capital directive or seeking 
other appropriate relief. The response must include any information, 
mitigating circumstances, documentation, or other relevant evidence 
that supports its position. The response may include a plan for 
achieving the minimum capital requirement applicable to the SBLC. The 
response must be in writing and delivered to the SBA within 30 days 
after the date on which the SBLC received the notice. In its 
discretion, SBA may extend the time period for good cause. SBA may 
shorten the 30-day time period:
    (A) When, in the opinion of SBA, the condition of the SBLC so 
requires, provided that the SBLC will be informed promptly of the new 
time period;
    (B) With the consent of the SBLC; or
    (C) When the SBLC already has advised SBA that it cannot or will 
not achieve its applicable minimum capital requirement.
    (ii) Failure to respond within 30 days or such other time period as 
may be specified by SBA will constitute a waiver of any objections to 
the proposed capital directive.
    (3) Decision. After the closing date of the SBLC's response period, 
or receipt of the SBLC's response, if earlier, SBA may seek additional 
information or clarification of the response. Thereafter, SBA will 
determine whether or not to issue a capital directive, and if one is to 
be issued, whether it should be as originally proposed or in modified 
form.
    (4) Issuance of a capital directive. (i) A capital directive will 
be served by delivery to the SBLC. It will include, or be accompanied 
by, a statement of reasons for its issuance.
    (ii) A capital directive is effective immediately upon its receipt 
by the

[[Page 75527]]

SBLC, or upon such later date as may be specified therein, and will 
remain effective and enforceable until it is stayed, modified, or 
terminated by SBA.
    (5) Reconsideration based on change in circumstances. Upon a change 
in circumstances, an SBLC may request SBA to reconsider the terms of 
its capital directive or may propose changes in the plan to achieve the 
SBLC's applicable minimum capital requirement. SBA also may take such 
action on its own initiative. SBA may decline to consider requests or 
proposals that are not based on a significant change in circumstances 
or are repetitive or frivolous. Pending a decision on reconsideration, 
the capital directive and plan will continue in full force and effect.
    (6) Relation to other administrative actions. A capital directive 
may be issued in addition to, or in lieu of, any other action 
authorized by law, including cease and desist proceedings. SBA also 
may, in its discretion, take any action authorized by law, in lieu of a 
capital directive, in response to an SBLC's failure to achieve or 
maintain the applicable minimum capital requirement.
    (7) Appeals. The capital directive constitutes a final agency 
action. An SBLC may appeal the final agency decision only in the 
appropriate federal district court.

Sandy K. Baruah,
Acting Administrator.
 [FR Doc. E8-29197 Filed 12-10-08; 8:45 am]
BILLING CODE 8025-01-P